Quantum Updates 15 | October 2024

Singapore High Court Orders WazirX & Zettai Pte. Ltd. to Address Creditors’ Queries Amid Ongoing Moratorium Proceedings

On 25 September 2024, the Singapore High Court, presided over by Judicial Commissioner Kristy Tan, held a moratorium hearing via Zoom regarding Zettai Pte. Ltd. Numerous creditors raised concerns about Zettai’s financial practices, transparency, and fairness in the proposed moratorium, which the company, connected to cryptocurrency platform WazirX, sought to address financial fallout from a significant hack. Creditors voiced opposition to the moratorium and raised allegations of manipulation and mismanagement by both Zettai and WazirX.

• Creditors accused WazirX and Zettai of manipulating the voting process for the moratorium, claiming they were not given an opportunity to vote against it.
• Allegations were made that WazirX and Zettai failed to provide a clear and fair voting structure, further fueling mistrust.
• Creditors demanded proof of reserves from Zettai and WazirX, questioning why unaffected users were covering losses from the hack.
• Some creditors suggested that the hack might have been an inside job, demanding a full investigation into potential insider involvement.
• Concerns were raised about WazirX using user funds for legal expenses without proper authorization, leading to further scrutiny of their financial practices.
• The court through its order directed Zettai to submit an affidavit within three weeks addressing all queries raised during the hearing, emphasizing the importance of transparency and financial disclosure.
• The moratorium has not yet been granted, with the court awaiting further information before making a final decision.
• The case will proceed once Zettai submits its affidavit, after which the court will assess creditor feedback and decide whether to grant the moratorium.

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US FinCEN & US Treasury Take Coordinated Actions Against Illicit Russian Virtual Currency Exchanges and Cybercrime Facilitators

On 26 September 2024, the United States Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury, through its order listed PM2BTC, a Russian-based virtual currency exchange, as a financial institution of “primary money laundering concern” under Section 9714(a) of the Combating Russian Money Laundering Act. This designation prohibits U.S. financial institutions from processing transactions with PM2BTC due to its involvement in illicit activities, including ransomware payments and sanctions evasion.

• PM2BTC processed between 43% and 50% of its total transactions related to illicit activities, including child exploitation, fraud, and laundering proceeds for Russian ransomware groups like Trickbot and Conti.
• The investigation found that PM2BTC operated within the Russian financial system, facilitating illegal cryptocurrency transactions tied to darknet markets like Hydra and Ferum Shop.
• PM2BTC violated the U.S. Bank Secrecy Act (BSA) and USA PATRIOT Act by failing to implement adequate Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols, allowing anonymous transactions and facilitating money laundering.
• The U.S. Department of the Treasury, alongside international partners such as Europol and the Netherlands Police, took coordinated action to seize PM2BTC’s domains and infrastructure, shutting down key websites linked to its illegal activities.
• The Office of Foreign Assets Control (OFAC) also sanctioned Russian national Sergey Ivanov, linked to PM2BTC, and the Cryptex exchange for involvement in cybercrime operations.
• The regulatory action includes prohibiting U.S. banks and financial institutions from transmitting funds to or from PM2BTC and mandates the rejection of any transactions inadvertently involving the entity.

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US CFTC’s Division of Clearing and Risk to Hold Roundtable on New and Emerging Clearing Issues

On 27 September 2024, the United States Commodity Futures Trading Commission (US CFTC)’s Division of Clearing and Risk announced a public roundtable discussion to be held on 16 October 2024 at the US CFTC headquarters in Washington, D.C. This roundtable will focus on exploring new and emergimmng issues in the clearing industry and will gather a wide range of participants, including derivatives clearing organizations, futures commission merchants (FCMs), FCM customers, traders, and regulators.

• Discussion topics include custody and delivery of digital assets, full collateralization, 24/7 trading challenges, non-intermediated clearing with margin, and conflicts of interest in vertically-integrated entities.
• The roundtable aims to gather expert insights and perspectives on adapting clearing systems to rapid technological advancements and new financial instruments.
• The event will be accessible to the public with live streaming on the US CFTC’s website and YouTube, and public comments are accepted until 23 October 2024.
• As the adoption of digital assets grows, the roundtable will address regulatory challenges such as market integrity, liquidity management, and investor protection.
• The US CFTC seeks to update regulatory frameworks to manage risks related to digital assets, operational security, and margin requirements in the evolving derivatives markets.
• The discussions held during the event will provide a larger perspective and its expected to help shape the regulatory future for digital assets and clearing mechanisms.

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US CFTC Charges Fake Commodity Trading Platform with Fraud and Misappropriation in Scheme Targeting Asian Americans

On 27 September 2024, the United States Commodity Futures Trading Commission (US CFTC) filed a  civil enforcement action in the U.S. District Court for the Western District of Washington against Aipu Limited, Fidefx Investments Limited, and individuals Qian Bai, Lan Bai, and Chao Li. The defendants are accused of defrauding 32 customers of at least US $3.6 million through a fraudulent investment scheme that targeted Asian Americans. They falsely claimed to offer trading in leveraged commodities and forex contracts while misappropriating customer funds.

• The defendants used social media platforms like WeChat, WhatsApp, and Line to solicit customers by falsely claiming insider trading expertise and guaranteed returns of up to 30%.
• Customers were encouraged to invest through the companies’ websites, www.aipufx.com and www.fidefxltd.com, but no actual trading took place. Instead, the funds were transferred to offshore accounts and misappropriated.
• The defendants are charged with fraud and misappropriation under the United States Commodity Exchange Act (US CEA), specifically violating Sections 4b(a)(2)(A)-(C) regarding fraudulent practices and Section 6(c)(1) for engaging in manipulative schemes.
• The defendants also failed to register with the US CFTC as required, and they bypassed regulations by not using licensed futures commission merchants (FCMs) or foreign currency dealers.
• The US CFTC seeks restitution for defrauded customers, disgorgement of ill-gotten gains, civil monetary penalties, and a permanent injunction to prevent the defendants from engaging in future commodity-related activities.
• The fraudulent activity underscores the global nature of the scheme, as funds were transferred to offshore accounts, highlighting the complexity of modern financial fraud.
• This case emphasizes the importance of regulatory enforcement in protecting U.S. consumers from cross-border fraud schemes involving digital assets and international financial networks.
• The US CFTC’s coordinated action with international regulators reflects the growing need for vigilance in combating financial fraud across borders.

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Singapore High Court Grants Zettai Pte. Ltd. Four-Month Moratorium Amidst Cryptocurrency-Related Financial Crisis

On 27 September 2024, the High Court of Singapore by its order granted Zettai Pte. Ltd. a four-month moratorium under Section 64 of Singapore’s Insolvency, Restructuring and Dissolution Act 2018 (SG IRDA), protecting the company from legal actions while it restructures amidst significant financial challenges caused by a major cryptocurrency hack. The order, overseen by Judicial Commissioner Kristy Tan, aims to stabilise Zettai as it works to recover from asset losses amounting to hundreds of millions.

• The moratorium protects Zettai from creditor actions, including winding-up resolutions, for four months.
• The company sought protection under section 64 of Singapore’s Insolvency, Restructuring and Dissolution Act 2018 to allow time for restructuring and recovery of assets.
• Creditors are barred from taking control of Zettai’s assets or initiating legal actions without court permission until moratorium expires.
• Zettai retains the right to pursue its own claims related to proceedings initiated before 23 August 2024.
• The court ordered Zettai to file affidavits disclosing detailed information about the hacked wallets, the status of user assets, and recovery efforts.
• Zettai must provide up-to-date financial records during the moratorium to ensure accountability and transparency.
• Any future court applications involving creditors will include independently verified electronic voting.
• Zettai must identify its top 22 creditors as part of the restructuring process.
• Customers affected by the cryptocurrency hack face uncertainty regarding the recovery of their assets, though Zettai is required to ensure transparency regarding the hacked funds.
• Zettai must develop a viable restructuring plan during the moratorium to satisfy both the court and creditors.

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UK FCA & BoE Unveil Digital Securities Sandbox: Opens Applications for Innovation and Real-World Testing

On 30 September 2024, the Bank of England and the UK Financial Conduct Authority (UK FCA) launched the Digital Securities Sandbox, and published the policy statement and guidance note on Digital Securities Sandbox operation under the UK Financial Services and Markets Act 2023 (FSMA). The DSS allows firms to test new financial market technologies, such as distributed ledger technology (DLT), in a real-world environment under the UK Financial Services and Markets Act 2023 (FSMA).

• This initiative is designed into four distinct phases to help firms develop and scale their innovations while meeting progressively stringent regulatory standards. Firms pass through four stages or “gates” in the Digital Securities Sandbox:
  • Gate 1: Firms apply to begin testing under regulatory supervision but do not yet conduct live business.
  • Gate 2: Firms approved for live activities can operate under specific limits, such as £600 million for gilts and £900 million for corporate bonds. A £40,000 fee and annual cost-recovery fees apply.
  • Gate 3: Firms can scale their activities if they meet higher regulatory standards, with limits varying by firm.
  • Gate 4: Firms that meet all requirements can gain full authorization to operate outside the Digital Securities Sandbox under a new permanent regime, potentially becoming a Central Securities Depository (CSD) or other FMI.
• The Digital Securities Sandbox enables firms to test and innovate in a controlled environment with regulatory oversight. However, standalone trading venues do not qualify for Digital Securities Sandbox entry as their regulatory framework remains unchanged.
• Applications are open until March 2027, and the Digital Securities Sandbox will run until December 2028, offering flexibility with firm-specific limits and fees.
• The Digital Securities Sandbox has been adjusted based on feedback from 33 industry participants, expanding the scope to include non-GBP assets, reducing capital requirements, and simplifying rules around bank guarantees and letters of credit.
• The sandbox aims to foster innovation in financial technologies while ensuring compliance with evolving standards, ultimately supporting the long-term growth and success of the UK’s financial markets.

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UK Crypto ATM Operator Pleads Guilty to Unregistered Network and Money Laundering Offences

On 30 September 2024, the UK Financial Conduct Authority (UK FCA) announced the conviction of Olumide Osunkoya, marking the UK’s first prosecution for operating an illegal network of crypto ATMs. Osunkoya pleaded guilty to five offences at Westminster Magistrates’ Court, related to running at least 11 unregistered crypto ATMs across the UK, which processed over £2.6 million in transactions between December 2021 and September 2023. Despite the FCA’s refusal to register his business in 2021, Osunkoya expanded his operations, bypassing anti-money laundering (AML) safeguards.

• Osunkoya operated the crypto ATMs in convenience stores across the UK, facilitating transactions without performing customer due diligence or verifying sources of funds.
• The court heard evidence suggesting that individuals involved in money laundering and tax evasion were using these ATMs.
• Osunkoya was also convicted of creating false documents, using a fake alias to evade detection, and possessing criminal property worth £19,540.
• The charges fall under the UK’s Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, the Forgery and Counterfeiting Act 1981, and the Proceeds of Crime Act 2002.
• The maximum penalties for these offences range from 2 years for unregistered operations to 14 years for possession of criminal property.
• Despite his application for registration through Gidiplus Ltd being refused in 2021, Osunkoya continued his illegal operations which resulted in his prosecution.
• Sentencing will take place at Southwark Crown Court, with the possibility of a lengthy prison term.

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Barclays Bank Settles with US CFTC Over Five Million Misreported Swap Transactions, Agrees to US$4 Million Penalty

On 30 September 2024, the United States Commodity Futures Trading Commission (US CFTC) announced that Barclays Bank PLC through a settlement order, settled charges related to its failure to accurately report over five million swap transactions between 2018 and 2023. The deficiencies in Barclays’ reporting systems led to violations of key provisions of the United States Commodity Exchange Act. As part of the settlement, Barclays agreed to pay a US $4 million civil monetary penalty and to take corrective actions to improve its reporting practices.

• The violations, which occurred between 2018 and 2023, resulted from Barclays’ failure to meet reporting standards required under the US Commodity Exchange Act.
• Reporting deficiencies included duplicate swap identifiers, incorrect reporting of primary economic terms, misreported timestamps, and inaccurate continuation data.
• More than 50,000 transactions were conflated due to identical identifiers, while 129,000 credit and interest rate swaps were incorrectly reported with inaccurate economic terms.
• The US CFTC identified over 4.5 million transactions with stale or incorrect continuation data, affecting the market’s transparency and systemic stability.
• Barclays cooperated with the investigation, voluntarily disclosing the issues and taking remedial actions to address the underlying causes.
• The bank committed to enhancing its internal controls and reporting systems to prevent future violations.
• Barclays’ settlement includes both a monetary penalty and compliance commitments to rectify reporting issues.

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U.S. SEC Announces Departure of Enforcement Director Gurbir S. Grewal, Names Acting Leadership

On 2 October 2024, the U.S. Securities and Exchange Commission (US SEC) announced the resignation of Gurbir S. Grewal, Director of the Division of Enforcement, effective 11 October 2024. Sanjay Wadhwa, the current Deputy Director of Enforcement, will take on the role of Acting Director, while Sam Waldon, Chief Counsel of the Division, will become Acting Deputy Director.

• Mr. Grewal joined the US SEC in July 2021 and led the Enforcement Division through a period of active regulatory action, emphasizing penalties that deter non-compliance.
• Mr. Grewal previously served as New Jersey’s Attorney General and U.S. Attorney, concluding his three-year term at the SEC.
• His tenure saw a focus on issues such as registration compliance, whistleblower protections, and recordkeeping deficiencies across industries.
• His enforcement achievements include over 2,400 actions resulting in more than US $20 billion in penalties and funds returned to investors.
• Sanjay Wadhwa, with over 21 years at the US SEC, will now serve as Acting Director, having led key investigations into insider trading, market manipulation, and institutional non-compliance.
• Sam Waldon, will now serve as Acting Deputy Director and has a background in enforcement and regulatory compliance, serving as Chief Counsel since 2022.

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US Judge Finds New California Election Deepfake Law Unconstitutional and Imposes Preliminary Injunction Against Assembly Bill 2839

On 2 October 2024, U.S. District Judge John A. Mendez through its order issued a preliminary injunction against California’s Assembly Bill 2839 (AB 2839), which aimed to regulate the use of AI-generated deepfakes in elections. The law, enacted in September 2024, permitted individuals to sue for damages if AI-generated political content was posted within a specific timeframe around elections. Judge Mendez ruled that the law likely violated the First Amendment, citing concerns about free speech and overbroad restrictions on political satire and parody.

• AB 2839 targeted “materially deceptive” AI-generated content that misrepresented political candidates, allowing lawsuits within 120 days before and 60 days after an election.
• The case began in July 2024 when Christopher Kohls, a political satirist, released an AI-manipulated video of Vice President Kamala Harris, sparking debate over deepfakes and electoral integrity.
• Kohls filed a lawsuit challenging the law’s constitutionality, arguing it infringed on First Amendment protections for political satire and parody.
• Kohls’ legal team argued the law was overly broad, vague, and could lead to censorship, discouraging creators from engaging in political satire.
• California’s Attorney General Rob Bonta defended the law, arguing its necessity to protect election integrity from the threat of AI-altered media.
• The State argued that AB 2839 targeted malicious and false content, vital for protecting voters from misinformation.
• Judge Mendez acknowledged the risks of AI-generated deepfakes but ruled that AB 2839 was too broad and did not adequately differentiate between deceptive content and protected speech.
• The judge observed that the law was a “blunt tool” that imposed broad restrictions on speech, failing to use less restrictive alternatives, such as fact-checking or counter-speech.
• The ruling prevents AB 2839 from taking effect while the case proceeds as the judge found it unconstitutional under both the First Amendment and California’s free speech protections.

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UK FCA Fines Starling Bank £29 Million for Failures in Financial Crime Systems and Controls

On 2 October 2024, the UK Financial Conduct Authority (UK FCA) announced the fine imposed on Starling Bank Limited and issued final notice against the fine of  £28,959,426 for failures in its anti-money laundering (AML) and financial sanctions screening controls. The FCA’s investigation revealed deficiencies in Starling’s financial crime systems, particularly its failure to comply with a prior agreement to restrict account openings for high-risk customers and flaws in its sanctions screening processes.

• Starling Bank experienced rapid growth, expanding from 43,000 customers in 2017 to over 3.6 million in 2023.
• In 2021, the UK FCA reviewed the bank’s financial crime controls and found deficiencies in its AML and financial sanctions screening framework.
• Despite agreeing not to open accounts for high-risk customers until improvements were made, Starling opened 54,000 accounts for 49,000 high-risk customers between September 2021 and November 2023, violating the FCA’s directive.
• In January 2023, Starling discovered that since 2017, its automated sanctions screening system had failed to screen customers against the full financial sanctions list.
• This lapse resulted in multiple potential breaches of financial sanctions, which Starling reported to relevant authorities after conducting an internal review.
• Starling’s failures involved violations of FCA financial crime regulations, particularly concerning AML and sanctions compliance, with significant risks posed to the integrity of the UK’s financial system.

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Dubai AI & Web3 Festival Conducted by DIFC Attracts Participation from Over 100 Countries

On 12 September 2024, the Dubai AI & Web3 Festival, organised under the directives of His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, successfully concluded with over 6,800 attendees from more than 100 countries. The two-day event, hosted by the Dubai AI Campus in collaboration with the Dubai International Financial Centre (DIFC), showcased Dubai’s growing role as a global hub for AI and Web3 technologies. The festival featured over 100 exhibitors and introduced key initiatives such as the Dubai AI Licence and AI as a Service (AIaaS) to attract companies and promote innovation in these emerging fields.

• Dubai AI Licence: Launched by DIFC to attract AI companies, building on the success of the DIFC Innovation Licence, which brought 1,100 businesses to the financial center.
• AI as a Service (AIaaS): A tool to help companies assess AI readiness, develop strategies, and implement AI solutions, positioning Dubai as a leader in AI adoption.
• Future Tech World Cup: AI and Web3 firms competed to showcase innovations with industry-revolutionising potential; the winner will be announced shortly.
• The event drew 6,800 delegates, including government officials, business leaders, academics, and heads of state from around the globe.
• 30 companies sponsored the festival, with partners such as Al Fardan Exchange, Holon, Hyperfusion, and the Dubai Chamber of Digital Economy.
• Several agreements were signed during the festival, including collaborations with Dubai Civil Defence, Holon, Kearney, Visa, and Zurich, aimed at advancing AI and Web3 technology adoption.
• The Dubai AI Licence provides a secure legal framework for AI and Web3 companies and ensures compliance with international standards for data privacy, ethics, and transparency.
• DIFC’s regulatory framework supports AI adoption with a focus on risk resilience, vendor management, and governance, reflecting Dubai’s forward-looking approach to tech and regulatory oversight.

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