Quantum Updates 8 | August 2024

New MAS Circular Tightens Rules on Establishing Sources of Wealth for High-Net-Worth Clients

On 26 July 2024, the Monetary Authority of Singapore (MAS) issued a new circular (AMLD 08/2024) aimed at enhancing the anti-money laundering (AML) and countering the financing of terrorism (CFT) measures within the wealth management sector. This directive targets financial institutions (FIs) dealing with high-net-worth individuals (HNWIs), and the necessity of thoroughly verifying the sources of their wealth (SOW) before initiating business relationships.

• The circular mandates financial institutions to establish the legitimacy of their clients’ wealth. This includes collecting information directly from the customers and independently corroborating this data against documentary evidence or publicly available sources.
• The key principles that FIs should follow, includes materiality, prudence, and relevance. Institutions are required to gather comprehensive information about a customer’s total wealth, with a focus on identifying and verifying the most significant or higher-risk sources of wealth. When it comes to material sources of wealth, the use of reliable, corroborative documents such as audited accounts or reports from independent third parties is strongly encouraged.
• The circular also advises continious ongoing monitoring. Information obtained during the initial SOW establishment should be integrated into ongoing customer monitoring processes, ensuring that all account activities align with the customer’s risk profile. For higher-risk clients, senior management within financial institutions must closely oversee the process, especially when significant portions of wealth cannot be fully corroborated.
• Collaboration between financial sector regulators, law enforcement, and government entities is also encouraged to address emerging risks of AML/CFT. The MAS continues engaging with the industry to develop best practices and ensure that Singapore remains a secure and attractive destination for legitimate wealth management.

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Bahamas Pioneers New Digital Asset Regulations: DARE Act 2024 Takes Effect from 29 July 2024

On 26 July 2024, the Securities Commission of the Bahamas (SCB) released the Digital Assets and Registered Exchanges Act 2024 (DARE Act), which officially took effect on 29 July 2024. This legislation is designed to provide a clear and comprehensive legal framework for the issuance, sale, and trade of digital assets, including non-fungible tokens (NFTs) and stablecoins along with digital asset derivatives. It also sets forth updated regulations for the operation of digital asset derivative businesses and exchanges within the Bahamas.

• The DARE Act 2024 replaces the previous Digital Assets and Registered Exchanges Act 2020, introducing more detailed regulations to address the growing complexities of digital assets and the associated technologies. The Act mandates that all Digital Asset Businesses—including exchanges, custody services, and staking operations—must be registered and regulated by the SCB.
• In addition to general business regulations, the Act imposes strict requirements on Token Offerings, including the necessity for adequate reserves and regular audits for stablecoins. It also introduces comprehensive rules governing digital asset derivatives and structured products. These products, which derive value from underlying digital assets or bundle multiple assets to offer regular income, are subject to rigorous registration, risk management, and capital requirements, as well as thorough disclosure and reporting standards.
• The DARE Act 2024 outlines a detailed registration process that requires digital asset businesses to submit extensive documentation to the Securities Commission. This includes information about the business structure, key personnel, and specific activities. Businesses must demonstrate sufficient financial resources and robust systems and controls to comply with the regulatory framework. The Act also includes a schedule of fees for various regulatory activities, such as registration, annual renewals, and penalties for late submissions.
• The ongoing obligations include requirements for financial reporting and auditing, maintaining capital and solvency standards, ensuring client asset protection, and compliance with anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations. The Act also mandates regular audits, inspections, and the implementation of market surveillance and anti-fraud measures. Moreover, businesses must notify the Securities Commission of any material changes and actively promote public education and awareness about digital assets.
• A notable provision of the DARE Act is the prohibition of digital asset mining as a primary business activity within the Bahamas, unless it is ancillary to a registered digital asset business. This regulation is intended to prevent energy-intensive mining operations from negatively impacting environmental sustainability and to maintain the financial stability of the digital asset market.
• The Act enforces strict penalties for non-compliance, including significant fines, imprisonment, or both, depending on the severity of the offense. The Securities Commission has the authority to impose administrative sanctions, such as freezing assets, issuing compliance orders, and barring individuals from participating in digital asset activities.

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Singapore Tightens Regulation of Fund Management Companies, Imposes Licensing Requirements & Enhanced AML-CFT Compliance

On 1 August 2024, the Monetary Authority of Singapore (MAS) implemented new guidelines concerning the operations of Fund Management Companies (FMCs) within Singapore. These guidelines introduce stricter licensing requirements and enhanced regulations to ensure that FMCs adhere to high standards of transparency, investor protection, and market integrity, especially in the context of the growing prominence of digital assets and cryptocurrencies.

• According to the new guidelines, any entity engaged in managing investment portfolios on behalf of clients in Singapore must now obtain a Capital Markets Services (CMS) license. This applies broadly to entities managing assets for individual investors or large institutional clients such as pension funds and insurance companies.
• The MAS emphasizes that FMCs must demonstrate substantive involvement in managing client assets, particularly digital assets by being actively involved in portfolio construction, asset allocation, and the execution of trades. The guidelines further clarify that entities merely acting as intermediaries or conduits for transactions do not qualify as FMCs under these new rules.
• For FMCs involved in digital asset investments, the guidelines impose additional obligations. These entities must disclose potential risks associated with digital assets, including price volatility and liquidity risks. FMCs are also required to ensure that digital assets under their management are independently valued, either by third-party service providers or through in-house functions that are separate from the investment management operations.
• Furthermore, FMCs must implement comprehensive risk management frameworks, particularly concerning customer assets. This includes managing cybersecurity threats, operational risks associated with private key management, and the inherent volatility of digital assets. The guidelines also reinforce the need for stringent anti-money laundering (AML) and countering the financing of terrorism (CFT) measures, requiring FMCs to conduct thorough client due diligence and ongoing monitoring of transactions.

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CFTC Secures $12.7 Billion Judgment Against FTX and Alameda for Massive Fraud Scheme

On 8 August 2024, the U.S. District Court for the Southern District of New York, in a landmark ruling, ordered FTX Trading Ltd. and Alameda Research LLC to pay $12.7 billion in monetary relief to victims of their fraudulent activities. This judgment, one of the largest in financial fraud history, reflects the extensive misconduct orchestrated by Samuel Bankman-Fried and his associated entities.

• The court mandated FTX and Alameda to pay $8.7 billion in restitution to customers whose funds were misappropriated. An additional $4 billion in disgorgement will further compensate victims through a supplemental remission fund.
• Investigations revealed that FTX falsely presented itself as a secure platform for trading digital commodities but instead commingled customer funds with Alameda’s and used them for unauthorized purposes, including luxury real estate purchases and high-risk investments.
• FTX employees, under Bankman-Fried’s direction, manipulated the platform’s code to allow Alameda to execute transactions without sufficient funds, effectively giving them an unlimited line of credit at the expense of FTX customers.
• The CFTC, in a related settlement approved by the Bankruptcy Court for the District of Delaware, agreed not to seek a civil monetary penalty against FTX, subordinating its claims to those of the victims.
• This ruling underscores the importance of comprehensive regulation in the digital commodity markets, as emphasized by CFTC Chairman Rostin Behnam, who highlighted the need for proper digital asset legislation to prevent similar frauds in the future.

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CFTC Awards Over $1 Million to Whistleblower in Digital Assets Investigation

On 8 August 2024, the Commodity Futures Trading Commission (CFTC) announced that it awarded over $1 million to a whistleblower who provided crucial information that significantly contributed to a successful enforcement action in the digital asset markets.

• The whistleblower’s information led directly to the CFTC’s action, underscoring the critical role that whistleblowers play in uncovering violations within the rapidly evolving digital asset sector.
• The CFTC’s Whistleblower Program, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has awarded approximately $380 million to whistleblowers to date, connected to enforcement actions resulting in nearly $3.2 billion in monetary sanctions.
• The program offers monetary rewards ranging from 10 to 30 percent of the sanctions collected in enforcement actions, funded by the CFTC’s Customer Protection Fund, ensuring that no money is taken from injured customers.
• The CFTC’s commitment to maintaining whistleblower confidentiality ensures that those who come forward can do so without fear of retaliation, reinforcing the program’s effectiveness in protecting market integrity.

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CFTC Proposes Joint Rule for Enhanced Financial Data Transparency

On 8 August 2024, the Commodity Futures Trading Commission (CFTC) proposed new technical data reporting standards to enhance transparency within the financial sector. Developed in collaboration with major financial regulatory agencies, this initiative aims to establish uniform standards for collecting and reporting financial information.

• The proposal introduces common identifiers for legal entities, financial instruments, and other critical data points to enhance consistency across regulatory bodies, making data sharing and analysis more efficient.
• This initiative is part of the broader implementation of the Financial Data Transparency Act of 2022 (FDTA), which aims to improve data transparency across the financial sector. The CFTC was designated as a covered agency under this Act in May 2024.
• Commissioner Caroline D. Pham, while supporting the proposal, expressed concerns about the potential financial burden these new standards could impose on firms, especially small entities, and encouraged stakeholders to provide feedback.
• The adoption of these data reporting standards is expected to improve the quality and accessibility of financial data, aiding regulators in detecting potential risks and ensuring the stability of the financial system.
• The public has 60 days following the proposal’s publication to provide feedback, allowing industry participants and other stakeholders to shape the future of financial data transparency.

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IRS Unveils Draft of New Digital Asset Reporting Form: Major Step Toward Compliance

On 9 August 2024, the Internal Revenue Service (IRS) released a preliminary draft of Form 1099-DA, which is designed to enhance the reporting of digital asset transactions. This new form will be mandatory for brokers starting in 2025 and is a key part of the IRS’s efforts to ensure that digital asset transactions are accurately reported and taxed according to federal regulations.

• Form 1099-DA, officially titled “Digital Asset Proceeds From Broker Transactions,” will require brokers to report the sales and exchanges of digital assets, beginning with transactions that occur in the 2025 calendar year. The finalized versions of these forms are scheduled to be distributed to both taxpayers and the IRS in early 2026.
• The IRS has made the draft form available for public review and is inviting comments to ensure that the final version meets the needs of both taxpayers and the agency. The draft form is not yet for official use and will undergo revisions based on the feedback received.
• The introduction of Form 1099-DA follows the IRS’s finalization of regulations in late June, which laid the groundwork for this new reporting requirement. These regulations and related notices, provide transitional relief and specific guidance for brokers as they prepare to comply with the new standards.
• Notably, the IRS has introduced transitional relief measures for brokers, including penalty relief for those who make good faith efforts to meet the reporting standards during the initial years of implementation. Additionally, certain digital asset transactions, such as staking and wrapping, are currently exempt from the new reporting requirements, as further study is needed to establish appropriate standards.

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ASIC’s 2024 Financial Advice Update Highlights Compliance, Cybersecurity, Ethical Practices, and Investor Protection

On 9 August 2024, the Australian Securities and Investments Commission (ASIC) released its 2024 financial advice update, focusing on compliance across several critical areas, including accurate record-keeping, cybersecurity, ethical practices, and investor protection.

• ASIC emphasized the importance of maintaining accurate records on the financial advisers register, ensuring that all advisers meet the required qualification standards before providing personal advice. The deadline for existing providers to meet these standards is 1 January 2026.
• The update also addressed unethical practices in the superannuation switching sector, particularly concerning cold calling and high-pressure sales tactics. ASIC stressed that robust monitoring and supervision mechanisms are essential to prevent such unethical practices.
• Cybersecurity remains a top priority, with ASIC highlighting the growing risk of third-party exposures. The commission urged financial institutions to enhance their cyber defenses, especially by implementing multifactor authentication (MFA) to protect against potential breaches.
• ASIC introduced a new registration requirement for financial advisers, effective from 16 February 2024, mandating that all relevant providers must be registered before offering personal advice to retail clients. The commission’s compliance program has already uncovered lapses in this area, emphasizing the need for strict adherence to these regulations.
• Through this update, ASIC reinforces its commitment to safeguarding investors and maintaining the integrity of the financial advice sector by promoting transparency, ethical conduct, and proactive risk management.

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SEC Charges OTC Link LLC with Failing to Report Suspicious Transactions, Imposes $1.19 Million Penalty

On 12 August 2024, the Securities and Exchange Commission (SEC) charged OTC Link LLC, a New York-based broker-dealer, with failing to file mandatory Suspicious Activity Reports (SARs) for over three years. The firm agreed to pay a $1.19 million penalty to settle these charges.

• OTC Link, which operates three alternative trading systems (ATS)—OTC Link ATS, OTC Link ECN, and OTC Link NQB—did not submit a single SAR between March 2020 and May 2023, despite being legally required to do so. These platforms handle numerous transactions daily, many involving high-risk microcap or penny stocks.
• The SEC’s investigation found that OTC Link’s anti-money laundering (AML) policies were insufficient to monitor and report suspicious activities, depriving regulators and law enforcement of crucial information needed to address potential misconduct in the securities markets.
• As part of the settlement, OTC Link agreed to a censure, a cease-and-desist order, and the continued involvement of a compliance consultant to enhance its AML procedures, ensuring future adherence to regulatory requirements.

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CFTC Penalizes Texas Firm $100,000 for Unregistered Broker Activities

On 12 August 2024, the Commodity Futures Trading Commission (CFTC) fined Cost Management Solutions LLC (CMS), a Texas-based firm, $100,000 for operating as an unregistered Introducing Broker (IB). The firm has been ordered to cease further violations of the Commodity Exchange Act (CEA).

• The CFTC’s investigation revealed that CMS had been performing IB functions—such as brokering swap and options transactions in energy commodities—without proper registration. This included soliciting quotes, negotiating trade terms, and executing transactions on behalf of clients, primarily propane retailers.
• CMS did not handle client funds or securities directly, but its failure to register as an IB constituted a clear violation of the CEA. The CFTC’s enforcement action underscores the importance of compliance with registration requirements to maintain market integrity.
• The CFTC encourages the public to verify the registration status of firms through the National Futures Association’s Background Affiliation Status Information Center (NFA BASIC) and report any suspicious activities through its toll-free hotline or online complaint system.

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RBI Deputy Governor Highlights Impact of CBDCs on Deposit Insurance at Asia Pacific Conference

On 13 August 2024, Reserve Bank of India (RBI) Deputy Governor Michael Debabrata Patra addressed the International Association of Deposit Insurers (IADI) Asia Pacific Regional Committee (APRC) International Conference in Jaipur, focusing on the evolving challenges for deposit insurers in a digital and climate-conscious world.

• Patra discussed the rapid digitalization of financial services, noting the potential of Central Bank Digital Currencies (CBDCs) to revolutionize payment systems. However, he cautioned that the impact of CBDCs on traditional bank deposits and deposit insurance remains uncertain, particularly in crises where CBDCs might be perceived as safer than bank deposits.
• He also highlighted the increasing use of tokenized deposits and instant payment systems (IPS), which are transforming domestic and cross-border transactions. These developments require deposit insurers to reassess operational risks and enhance cooperation with other financial safety net participants.
• Patra emphasized the rising threat of climate change-related financial risks, urging deposit insurers to prepare for potential impacts on banks’ balance sheets. He called for the development of climate risk-based premiums, stress testing, and the incorporation of sustainability into risk management practices.

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US SEC and Latvijas Banka Join Forces to Strengthen Virtual Asset Oversight

On 13 August 2024, the United States and Latvia launched a joint initiative to enhance the supervision and regulation of operational risks associated with virtual asset service providers. Latvijas Banka is hosting a three-day training program where U.S. experts will share their knowledge with Latvian financial supervisory and law enforcement authorities.

• This collaboration involves the U.S. Securities and Exchange Commission, the New York State Department of Financial Services, the U.S. Department of the Treasury, and Latvijas Banka. The training aims to exchange best practices in managing the complexities of virtual assets while balancing regulation and innovation.
• The training will cover topics such as compliance, market integrity, consumer protection, and the operational risks of virtual assets, including anonymity-enabling technologies and blockchain platforms. The program will also explore the potential for traditional banks to transition into virtual asset service providers.
• The collaboration is expected to strengthen the regulatory frameworks within Latvia and across the broader Nordic and Baltic regions, enhancing the capabilities of financial supervisors and creating a more secure and competitive financial environment.
• U.S. Ambassador to Latvia, Christopher Robinson, and Latvijas Banka Governor, Mārtiņš Kazāks, highlighted the importance of this initiative in fostering economic growth while maintaining financial resilience. The training program brings together over 30 experts, creating a strong network committed to advancing the digital asset industry.

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MAS Signs MoU with Banks and Tech Partners to Bolster Quantum Computing Security Against Emerging Threats

On 14 August 2024, the Monetary Authority of Singapore (MAS) in a step towards strengthening the nation’s financial sector against emerging cybersecurity threats by signed a Memorandum of Understanding (MoU) with several leading banks and technology partners. The MoU involves a collaboration between MAS and major banks including DBS, HSBC, OCBC, and UOB, along with technology partners SPTel and SpeQtral, representing a cross-section of Singapore’s financial and technological leadership.

• This initiative builds on the National Quantum Strategy announced by Deputy Prime Minister Heng Swee Keat on 30th May 2024 and MAS’s commitment to further invest in quantum and artificial intelligence (AI) technologies through an additional S$100 million allocation under the Financial Sector Technology and Innovation Grant Scheme (FSTI 3.0).
• Under the framework of this MoU, MAS and the participating institutions will engage in proof-of-concept trials using Quantum Key Distribution (QKD) technology. QKD leverages quantum mechanics to securely distribute encryption keys, offering a potential solution for maintaining secure communication channels in the quantum era. These trials will take place in controlled sandbox environments to simulate real-world scenarios, with a key focus on validating QKD’s security features, such as its ability to detect eavesdropping and prevent unauthorized access to encrypted data.
• The MoU also emphasizes the importance of knowledge exchange among all participants, ensuring that the financial sector is well-prepared for the transition to quantum security solutions. This collaboration aims to enhance the technical competencies of the institutions involved, equipping them with the expertise necessary to implement and manage quantum-safe communications effectively.
• Quantum computing harnesses the principles of quantum mechanics, allowing quantum computers to perform complex calculations far more efficiently than classical computers. However, this same power poses significant challenges, particularly in cybersecurity, as it can potentially break many of the encryption methods currently used to secure data. This could render traditional cryptographic methods vulnerable, putting the security of financial transactions, data exchanges, and digital signatures at risk.
• To mitigate these risks, MAS published an advisory on 20th February 2024, outlining several key actions for financial institutions (FIs) to undertake. These include developing “crypto-agility,” the ability to seamlessly transition from current cryptographic algorithms to post-quantum cryptography (PQC), exploring QKD technology, and continuously monitoring advancements in quantum computing to stay ahead of potential cybersecurity threats.
• The MoU also calls for FIs to maintain a detailed inventory of their cryptographic assets, identify vulnerable assets, and prioritize the migration to quantum-resistant encryption methods. Additionally, FIs are encouraged to classify their IT and data assets based on sensitivity and risk exposure, ensuring that the most critical assets are protected first. Assessing whether existing systems can support necessary upgrades is also crucial to facilitate a smooth transition.
• Building technical competency among staff is another key focus, with MAS advising FIs to review and update internal policies to align with the latest quantum security requirements. Conducting proof-of-concept trials with quantum security technologies is also recommended to help FIs understand the practical challenges of implementing these solutions and prepare adequately for the transition.
• Leaders from the institutions involved in the MoU, including Eugene Huang (DBS), Tancy Tan (HSBC Singapore), Praveen Raina (OCBC), Albert Kho (UOB), Lum Chune Yang (SpeQtral), and Titus Yong (SPTel), have expressed strong support for the initiative.

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SEC Chairman Warns of AI’s Impact on Investment Decisions and Potential Conflicts of Interest

On 14 August 2024, Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), issued a cautionary statement regarding the increasing influence of artificial intelligence (AI) in financial markets. Gensler emphasized the potential risks AI poses to investors, particularly concerning how AI-driven platforms might create conflicts of interest that could lead to suboptimal financial decisions.

• Gensler highlighted the darker side of this technology. He raised concerns that AI algorithms, while enhancing user experience, could also be manipulated to serve the financial interests of the platforms themselves rather than those of the investors. By exploiting subtle individual preferences, such as color choices or psychological triggers, AI could potentially influence investment decisions in ways that are not in the best interest of the user.
• The SEC is actively addressing these potential conflicts of interest through proposed regulations that would ensure AI-driven financial platforms adhere to the same standards of transparency and fairness as their human counterparts. Gensler emphasized that regardless of whether financial advice is delivered by a human or an AI system, it must always prioritize the client’s best interests.
• The proposed rule, introduced last year, seeks to mitigate these conflicts across various investor interactions, from Robo-advisors to traditional brokers. By addressing the evolving challenges posed by AI, the SEC aims to protect investors while fostering innovation in the financial industry.
• As decentralized finance (DeFi) platforms and crypto exchanges increasingly rely on AI, the potential for conflicts of interest grows. Gensler stressed the importance of transparency and fairness in these emerging markets, urging investors to remain vigilant and ensure that the AI tools they use align with their financial goals rather than being manipulated to serve the interests of the platform.

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Korea Fintech Week 2024: Pioneering the Future of Finance with AI and Global Innovation

On 25 July 2024, the South Korean Financial Services Commission (FSC) announced the schedule for Korea Fintech Week 2024, set to take place from 27 to 29 August 2024 at the Dongdaemun Design Plaza in Seoul. This event, the largest in Korea’s history, will focus on the transformative role of artificial intelligence (AI) in the financial sector.

• The event will feature participation from leading fintech companies, financial institutions, academic bodies, and international organizations. Over 85 exhibition booths will be spread across four specialized halls, showcasing the latest AI-driven financial technologies aimed at enhancing user convenience, improving security, and driving industry innovation.
• Eleven specialized seminars will be held, covering topics such as AI integration in fintech, strategic investment approaches, and environmental, social, and governance (ESG) considerations.
• Networking and investment opportunities will be a key focus, with a mobile business meeting platform, expanded IR Open Stage, and Networking Lounge. The Korea Development Bank (KDB) will host special sessions to attract global investments and support the international expansion of Korean fintech firms.
• A global talk concert on fintech and AI, moderated by renowned AI experts, will explore the implications of AI technologies on the financial industry along with interactive programs, including a fintech idea contest, finance-themed musical and career mentoring program.

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