ADGM Introduces Consultation Paper for Fiat-Referenced Stablecoin Issuers
On 20 August 2024, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) issued Stablecoin Consultation Paper No. 7, proposing a regulatory framework for the issuance of Fiat-Referenced Tokens (FRTs).
- The framework addresses areas such as reserve asset requirements, redemption rights, capital adequacy, and governance, ensuring financial stability, transparency, and consumer protection.
- Issuers must obtain a Financial Services Permission (FSP) from the Abu Dhabi’ FSRA and submit a detailed application, including a white paper on reserve management and redemption policies.
- Issuers are required to maintain highly liquid reserve assets at least equal to the par value of all outstanding tokens, with monthly independent attestations.
- Stablecoin holders must be able to redeem tokens at par value within two business days, and issuers must maintain a capital buffer of at least $2 million or their annual audited expenditure.
- Stress testing is mandated annually, assessing liquidity stress and resilience during high redemption demand or sharp asset value declines to protect against market volatility.
- The Abu Dhabi’s FSRA has proposed application and annual supervision fees of $70,000 for entities issuing FRTs.
- Stakeholders can provide feedback on the proposed framework until 3 October 2024, with final regulations to be enacted afterwards.
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WazirX Parent Company Seeks Moratorium in Singapore High Court Amid Financial Crisis
On 27 August 2024, Zettai Pte. Ltd., the parent company of cryptocurrency exchange WazirX, filed for a moratorium with the Singapore High Court under Section 64 of the Singapore’s Insolvency, Restructuring, and Dissolution Act 2018.
- The application, registered as Case No. HC/OA 861/2024, seeks a six-month halt on winding-up resolutions and legal proceedings to allow Zettai time to restructure.
- The moratorium, if approved, would prevent new and ongoing legal actions, including those from courts, arbitral tribunals, and administrative agencies, without express court permission.
- Moratorium will provide Zettai “breathing space” to explore restructuring options, engage with potential investors, and stabilize operations to improve recoveries for WazirX’s users.
- The company is facing financial difficulties following a cyberattack on 18 July 2024, which resulted in the loss of approximately USD 234 million in digital assets from a WazirX wallet.
- The cyberattack has led to the suspension of user withdrawals and trading on the platform, with over 4.4 million users affected and around 10,000 withdrawal requests filed since the incident.
- Zettai has hired Kroll Pte Ltd as financial advisors and Rajah & Tann Singapore LLP as legal advisors to assist in restructuring efforts and find potential investors to inject capital.
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Latvijas Banka invites Pre-Licensing Consultations Ahead of New EU Regulations
On 29 August 2024, the Bank of Latvia extended an invitation to crypto-asset service providers (CASPs) and consulting firms to participate in pre-licensing consultations in preparation for the upcoming European Union Markets in Crypto-Assets Regulation (EU MiCA).
- Latvijas Banka is offering pre-licensing consultations ahead of the formal application process starting in January 2025 to assist companies in understanding regulatory requirements.
- EU MiCA will take effect on 30 December 2024 which will establish a unified regulatory framework for the crypto-asset industry across the EU.
- All crypto-asset service providers will be required to obtain an operating permit to conduct business in the EU.
- The consultations aim to clarify necessary documentation, compliance standards, and guide companies through the licensing process.
- Guides have been published by the Bank of Latvia to help businesses navigate the application process with timelines and required documents.
- These guides explain the classification of crypto-assets under EU MiCA, helping companies determine which assets fall under the new regulation.
- Registration for the webinar is open until 27 September 2024.
- On 30 September 2024, Latvijas Banka will host a webinar covering the licensing process, anti-money laundering (AML) requirements, the advantages of participating in Latvia’s regulatory sandbox for crypto-asset service providers along with insights into the European Union’s Digital Operational Resilience Act (EU DORA).
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CFTC Approves Kalshi Klear LLC Refistration as DCO: New Era of Event-Based Trading in the Financial Markets
On 29 August, 2024, the United States’ Commodity Futures Trading Commission (US CFTC) approved Kalshi Klear LLC’s registration as a derivatives clearing organization (DCO) under United States Commodity Exchange Act (US CEA).
- Kalshi Klear LLC, an affiliate of KalshiEx LLC, which is already registered as a designated contract market, is newly designated as DCO.
- Kalshi Klear is the first US CFTC-regulated exchange focused on trading event-based outcomes, introducing a new asset class known as event contracts.
- The platform allows participants to trade on a real-world events, which might include inflation rates, government shutdowns, and Supreme Court decisions, enabling both individuals and institutions to hedge risks or speculate on future outcomes.
- Market participants can take Yes or No positions on events, with the contract pricing reflecting the market’s collective view of the probability that the event will occur.
- The introduction of regulated event contracts provides an alternative way to hedge risks associated with specific events, potentially influencing traditional financial markets and diversifying available financial instruments.
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Hong Kong Monetary Authority Imposes Penalty on WeChat Pay Hong Kong for Anti-Money Laundering Failures
On 29 August, 2024, the Hong Kong Monetary Authority (HKMA) imposed a penalty of HK$875,000 on WeChat Pay Hong Kong Limited for failures related to anti-money laundering (AML) and counter-financing of terrorism (CFT) controls under Hong Kong’s Payment Systems and Stored Value Facilities Ordinance (HK PSSVFO).
- The penalty was the result of an HKMA investigation into WPHK’s AML/CFT compliance practices between 25 August 2016, and 24 October 2021.
- WeChat HK failed to meet the required standards for customer due diligence (CDD) and enhanced due diligence (EDD) in high-risk scenarios involving potential money laundering and terrorist financing.
- The investigation revealed that WeChat HK did not properly categorize certain law enforcement intelligence as trigger events, delaying necessary CDD reviews.
- In some cases, the enhanced due diligence measures were delayed by up to 900 days, prolonging the identification and management of high-risk customers.
- WeChat HK has since implemented measures to address these deficiencies, reinforcing AML/CFT controls within the financial industry.
- Raymond Chan, Executive Director of Enforcement and AML at the HKMA, issued a statement on the importance of effective due diligence for Stored Value Facility (SVF) licensees in Hong Kong’s to manage money laundering and terrorism financing risks effectively.
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U.S. Court Orders $230 Million in Penalties for Fraud in Commodity and Digital Asset Trading
On 3 September 2024, the United States’ Commodity Futures Trading Commission (US CFTC) announced a court ruling imposing penalties in the case Commodity Futures Trading Commission v. Jafia LLC, Sam Ikkurty (a/k/a Sreenivas I. Rao), and Ravishankar Avadhanam, related to a Ponzi scheme involving crypto and carbon investment funds.
- The United States District Court for the Northern District of Illinois, led by Judge Mary Rowland, issued the final judgment on 22 July 2024, imposing financial penalties and a permanent injunction on the defendants.
- The defendants were involved in fraudulent investment schemes, misappropriating funds solicited for investments in commodity interests and digital assets.
- Penalties include $83,757,249 in restitution to investors, $36,967,285 in disgorgement for profits made through fraud, and a civil monetary penalty of $110,901,855.
- The court also found that the defendants violated the United States’ Commodity Exchange Act (US CEA) by making false statements, engaging in deceptive practices, and failing to register with US CFTC.
- Defendants are permanently barred from engaging in commodity or digital asset transactions, including trading and soliciting funds, and are prohibited from applying for registration with US CFTC.
- An additional $13,817,000 penalty was imposed on Sam Ikkurty for unauthorized transfers of digital assets from court-ordered receivership accounts, along with a daily fine of $254,000 for continued non-compliance.
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MAS Issues Prohibition Order Against Former Broker Involved in Market Misconduct
On 3 September 2024, the Monetary Authority of Singapore (MAS) issued a five-year prohibition order against Mr. Chong Yew Mun Alan, a former representative of RHB Securities (Singapore) Pte. Ltd., for his involvement in market misconduct.
- Mr. Chong was convicted under the Singapore’s Securities and Futures Act (SG SFA) for participating in a market manipulation scheme involving false trading in the shares of Catalist-listed Koyo International Limited.
- Between December 2015 and January 2016, Mr. Chong executed trades in Koyo shares across 15 accounts without proper authorization, creating a misleading impression of rising share prices.
- He acted on instructions from Mr. Lin Eng Jue, who used Mr. Chong and others to artificially inflate Koyo’s share price to attract a buyer for a reverse takeover.
- Mr. Chong was sentenced to 11 weeks’ imprisonment in July 2023 for abetting false trading and deceiving brokerage firms.
- The prohibition order bars Mr. Chong from providing financial advisory services, managing or directing financial advisory firms, and engaging in capital market activities under the SFA.
- The investigation has led to the conviction of eight individuals involved in the scheme, with losses amounting to approximately $3.28 million, including $1.05 million borne by brokerages.
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SEC Charges Six Credit Rating Agencies with $49 Million in Penalties for Recordkeeping Failures
On 3 September 2024, the U.S. Securities and Exchange Commission (US SEC) charged six nationally recognized statistical rating organizations, including Moody’s, S&P Global Ratings, and Fitch Ratings, for failing to maintain and preserve electronic communications in violation of federal securities laws, resulting in over $49 million in penalties.
- Moody’s Investors Service and S&P Global Ratings were each fined $20 million for failing to comply with recordkeeping rules related to credit rating activities. Employees used unapproved messaging platforms like WhatsApp, and communications were not retained as required.
- Fitch Ratings was fined $8 million for similar violations, with employees, including senior staff, using personal and company-issued devices to communicate via unapproved platforms since 2020.
- A.M. Best Rating Services, Inc. was fined $1 million for failing to retain key business communications, including those conducted via personal devices. A cease-and-desist order was issued, and corrective actions were initiated.
- HR Ratings de México, S.A. de C.V. was fined $250,000, and Demotech, Inc. $100,000, for using unapproved platforms and failing to preserve communications since 2020. Both firms agreed to cease-and-desist orders and corrective measures.
- All firms were found in violation of Section 17(a)(1) and Rule 17g-2(b)(7) of the United States’ Securities Exchange Act of 1934, which mandates the retention of crucial records.
- Except for A.M. Best and Demotech, the firms are required to hire compliance consultants to review and address recordkeeping non-compliance issues.
- Sanjay Wadhwa, Deputy Director of the US SEC’s Division of Enforcement, issued a statement on the importance of maintaining proper records to ensure compliance and accountability, noting that failures in recordkeeping hinder the SEC’s ability to protect investors.
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CFTC Orders Uniswap Labs to pay $175K Penalty for Breaking the Rules in DeFi Dealings
On 4 September 2024, the United States’ Commodity Futures Trading Commission (US CFTC) issued an Order Instituting Proceedings and imposed a $175,000 penalty on Universal Navigation Inc., operating as Uniswap Labs, for violations of the United States’ Commodity Exchange Act (US CEA).
- Uniswap Labs was found to have facilitated off-exchange leveraged token transactions with retail customers who were not Eligible Contract Participants (ECPs) from March 2021 to September 2023.
- The decentralized finance (DeFi) platform allowed users to trade leveraged tokens without regulatory compliance, leading to a violation of U.S. laws for retail leveraged transactions.
- The US CFTC cited Uniswap Labs for breaching Section 4(a) of the US CEA, which prohibits off-exchange commodity transactions, and Section 2(c)(2)(D)(iii), which regulates retail leveraged transactions that do not result in the actual delivery of underlying assets.
- Uniswap Labs settled the case without admitting or denying the allegations, agreeing to the civil monetary penalty and corrective actions, including ceasing further violations of US CEA.
- Commissioner Summer K. Mersinger in her statement criticized the CFTC’s enforcement, warning that it could stifle DeFi innovation and drive developers overseas due to the lack of regulatory clarity and guidance.
- Commissioner Caroline D. Pham in her statement dissented, arguing that there was insufficient evidence regarding the specific terms of the leveraged tokens and that the US CFTC’s broad interpretation could harm small businesses and U.S. innovation.
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