UAE Introduces New VAT Regulations Affecting Virtual Assets: What Businesses Need to Know
On 6 September 2024, the UAE Cabinet issued Cabinet Decision No. 100 of 2024, amending the UAE’s Federal Decree-Law No. 8 of 2017 on Value Added Tax. These amendments discuss the VAT treatment of virtual assets such as cryptocurrencies and provide clear guidelines for businesses involved in virtual asset transactions. The new regulations will be effective from 15 November 2024 and requires businesses handling virtual assets to ensure compliance with the updated tax laws.
- Virtual assets, defined as digital representations of value, are now categorized similarly to traditional financial products like stocks or bonds. Transactions involving explicit fees or commissions for services such as conversion, management, or transfer of virtual assets will now be subject to VAT.
- Services that do not involve an explicit fee, such as providing custody of virtual assets without direct compensation, will remain exempt from VAT.
- Services related to virtual assets, such as trading, conversion, or management, will attract a 5% VAT if conducted for a fee or commission. However, services offered without direct financial compensation, such as custodial services, will remain VAT-exempt.
- Virtual assets included as part of a company’s capital will require VAT adjustments, with the adjustment period for virtual assets set at five years. Companies must account for changes in their VAT liability based on shifts in their asset usage toward taxable activities.
- Cryptocurrency exchanges, wallet providers, and businesses using virtual assets must update their accounting systems and pricing models to comply with the VAT changes. Companies offering services for a fee, such as converting one cryptocurrency to another, will now need to charge VAT on these transactions.
- The changes come into effect on 15 November 2024, and businesses must review and update their tax compliance procedures, invoicing systems, and internal accounting processes to ensure they correctly charge VAT on taxable services involving virtual assets.
- This amendment brings virtual assets into the same regulatory framework as traditional financial services and clarifies the tax obligations for companies involved in virtual asset transactions, ensuring that VAT is properly applied to taxable services while exempting those provided without financial compensation.
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South Korean FSC Announces Establishment of Digital Asset Protection Foundation to Secure Safe Return of Funds Amid VASP Closures
On 25 September 2024, the South Korean Financial Services Commission (SK FSC) approved the creation of the Digital Asset Protection Foundation, aimed at protecting users’ assets when virtual asset service providers (VASPs) shut down. Led by the Digital Asset Exchange Association (DAXA), the foundation is designed to manage and return users’ funds safely, addressing ongoing concerns about asset recovery following VASP closures.
- The foundation’s creation comes in response to issues with returning assets after VASP closures, with ten out of twenty-two coin market exchange operators already out of business. Previous guidelines and inspections had not fully resolved the lengthy and complex process of asset return.
- Many closed VASPs hold users’ private keys, increasing the risk of asset mismanagement or loss. The foundation will securely manage these assets and ensure their eventual return to users.
- DAXA, under the guidance of the FSC, developed the foundation to align with the industry’s self-regulatory efforts. Cash deposits will be stored in banks, and digital assets will be managed by a designated KRW-based exchange service provider.
- An operating committee, including representatives from banks, the KRW-based exchange, and financial experts, will oversee the foundation’s operations to ensure compliance with the Virtual Asset User Protection Act and other regulatory guidelines.
- Financial authorities will support the foundation by facilitating asset transfers and ensuring that VASPs expected to close transfer customer assets securely.
- The foundation will be officially established upon court registration, expected by October 2024. It will begin consultations with closed VASPs to ensure the safe and timely recovery of users’ assets, helping to maintain market stability and user confidence.
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HKVAX Secures Regulatory Licenses, Strengthening Its Position as a Leading Virtual Asset Platform in Hong Kong
On 2 October 2024, Hong Kong Virtual Asset Exchange (HKVAX) announced it had obtained Type 1 (dealing in securities) and Type 7 (providing automated trading services) licenses from Hong Kong’s Securities and Futures Commission (HK SFC) and a license under the Hong Kong’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). This makes HKVAX the third regulated virtual asset platform in Hong Kong, alongside HashKey Group and OSL, to serve retail customers.
- HKVAX integrates traditional financial services with blockchain technology, offering OTC trading, a 24/7 trading platform, and secure custody with multi-signature technology and wallet separation.
- The platform focuses on Security Token Offerings (STOs) and Real-World Asset (RWA) tokenization, enhancing liquidity and creating new opportunities for professional investors.
- The Type 1 license allows HKVAX to deal in securities, while the Type 7 license enables it to provide automated trading services, under Hong Kong’s Securities and Futures Ordinance (SFO).
- The AMLO license ensures HKVAX adheres to anti-money laundering and counter-terrorist financing standards, implementing robust Know Your Customer protocols to protect investors and ensure transparency.
- The licensing process required HKVAX to demonstrate compliance with regulations, including capital reserves, secure custody, and advanced cybersecurity measures.
- Anthony Ng, Co-Founder and CEO of HKVAX, emphasized the company’s goal to position Hong Kong as a hub for STO and RWA trading in Asia.
- HKVAX is forming partnerships with industry players, including brokers, Money Service Operators (MSOs), and ETF issuers, to build a virtual asset infrastructure supporting Hong Kong’s financial innovation.
- The company plans to introduce end-to-end virtual asset management services, focusing on consulting for asset tokenization, technical support, secondary market trading, and custody solutions.
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G7 Competition Authorities and Policymakers Summit: Framework to Ensure Fair Competition in AI Markets
On 3 October 2024, the G7 Competition Authorities and Policymakers Summit met in Rome, Italy, to address the competitive challenges posed by the rapid growth of artificial intelligence (AI), particularly Generative AI (GenAI). Hosted by the Italian Competition Authority, the central theme of the summit focused on maintaining fair competition in AI markets while preventing the concentration of market power and unfair practices. Among many participants included the US Justice Department’s Antitrust Division and the Federal Trade Commission.
- The summit built on discussions from earlier G7 meetings, emphasizing the need to regulate AI to foster innovation and competition, while preventing market dominance by a few large firms.
- The communiqué highlighted concerns over AI market characteristics such as high development costs, economies of scale, and proprietary data control, which could entrench incumbents and create barriers for new entrants.
- Participants expressed concern about the control of critical AI inputs, like computing infrastructure and specialized chips, by a few dominant firms, which could limit access for smaller competitors.
- The potential for large digital platforms to leverage their dominance in both digital and AI markets was identified as a key concern, with practices such as self-preferencing, bundling, and network effects flagged as risks to competition.
- Broader societal concerns were raised, including the protection of intellectual property in AI training data and the risk of consumer manipulation through AI-generated outputs.
- The communiqué outlined guiding principles to ensure open and fair AI markets, focusing on transparency, accessibility to AI inputs, and preventing the exploitation of market power by dominant platforms.
- Competition authorities committed to proactive enforcement of competition laws in AI markets and emphasized the need for tailored remedies, particularly regarding network effects and data feedback loops.
- International cooperation and knowledge-sharing were highlighted as essential to staying ahead of the challenges posed by AI, with a focus on developing the technological expertise needed to detect and address competition risks early.
- As AI technologies continue to evolve, the G7 competition authorities reaffirmed their commitment to promoting fair competition, closely monitoring market developments, and fostering an open and innovative AI ecosystem.
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Singapore Enforces New Anti-Money Laundering Rules: Tightens Crypto Regulations to Combat Money Laundering
On 4 October 2024, Singapore’s Inter-Ministerial Committee (IMC) issued its report following a comprehensive review of the country’s Anti-Money Laundering (AML) framework. The report provides recommendations aimed at strengthening Singapore’s defenses against money laundering and aligning its regulatory measures with global best practices. This action comes after a major operation in August 2023 that resulted in the arrest of ten individuals and the seizure of more than SG$3 billion in assets, which highlighted the need to bolster the country’s AML framework.
- The IMC recommended strengthening gatekeeper responsibilities, requiring financial institutions, corporate service providers (CSPs), real estate agents, and dealers in precious metals to conduct thorough Customer Due Diligence (CDD) to prevent criminals from misusing corporate structures.
- The regulatory framework has been expanded to include non-financial institutions, reducing opportunities for money laundering through non-traditional financial channels. There is also greater scrutiny on corporate structures to prevent the misuse of shell companies for laundering money.
- The IMC launched the COSMIC platform to facilitate real-time data sharing among financial institutions and agencies, creating a unified approach to detecting suspicious activities. The report also proposed a National AML Verification Interface (NAVIGATE) to pool intelligence and improve detection.
- Legislative amendments under Singapore’s Anti-Money Laundering and Other Matters Act (AMLOM Act) were passed in August 2024, lowering the burden of proof in cases involving foreign criminal proceeds and streamlining prosecutions for complex, transnational schemes.
- The Cross-Border Cash Reporting Regime (CBCRR) introduced high penalties for undeclared cross-border cash movements and implemented electronic reporting to deter the use of physical cash in money laundering.
- Cryptocurrency service providers and digital payment token providers, including exchanges and wallet services, must now comply with robust CDD procedures under Singapore’s Payment Services Act. The Singapore’s AML regulations also cover stablecoins, requiring them to adhere to the same standards as fiat currencies.
- MAS have enforced the “travel rule” requiring virtual asset service providers to share information about the originator and beneficiary of cryptocurrency transactions during transfers, ensuring greater transparency in virtual asset transfers.
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US CFTC Hosts Events During World Investor Week to Highlight Fraud Protection and Relationship Scams
On 4 October 2024, the United States Commodity Futures Trading Commission (US CFTC), through its Office of Customer Education and Outreach (OCEO), announced two key events scheduled for 8 and 9 October 2024 as part of World Investor Week. These events aim to educate the public about fraud protection, focusing on the increasing prevalence of scams involving digital assets such as cryptocurrency.
- World Investor Week, organized by the International Organization of Securities Commissions (IOSCO), runs from October 7 to 13, 2024, bringing together organizations from over 100 jurisdictions to raise awareness about investor education and protection.
- The rise of digital and crypto assets has led to the evolution of fraudulent schemes, including “romance investment fraud,” where fraudsters build fake relationships to convince victims to invest in fraudulent crypto schemes, ultimately stealing their money.
- The first event, Romance Investment Fraud: A Global-Scale Crypto Scam, will take place on 8 October 2024, featuring Dr. John Griffin, who will present his research on how crypto flows finance illicit activities like slavery and human trafficking. The event will include federal regulators discussing the scale of the issue and how to recognize such scams.
- The second event on 9 October 2024, Protect Yourself: NFA and CFTC Resources, will be co-hosted by the US CFTC and the National Futures Association (NFA) to educate participants on tools and resources available to protect themselves from fraud in the digital investment space.
- Both events are free and open to the public, offering in-person and virtual attendance options, aimed at empowering individuals with knowledge to prevent becoming victims of investment fraud and identifying high-risk schemes.
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Monetary Authority of Singapore Issues Consultation Paper on Regulatory Approach for Digital Token Service Providers
On 4 October 2024, the Monetary Authority of Singapore (MAS) published a Consultation Paper on the Proposed Regulatory Approach, Regulations, and Notices for Digital Token Service Providers (DTSPs) under the Singapore’s Financial Services and Markets Act 2022 (FSM Act). This paper outlines a new regulatory framework to ensure that DTSPs, operating from Singapore for customers both inside and outside the country, comply with strict regulations aimed at preventing risks such as money laundering and terrorism financing. Public feedback on the proposal is invited until 4 November 2024.
- The consultation paper introduces the requirement for all DTSPs, even those serving only international clients, to apply for a license under the Singapore’s FSM Act to ensure high compliance standards and safeguard Singapore’s financial reputation.
- Digital token services include the transfer, storage, and trading of digital tokens, such as cryptocurrencies or digital representations of capital market products. The paper emphasizes the importance of preventing misuse of these assets for illegal purposes.
- DTSPs will need to demonstrate economic viability and compliance with international standards during the licensing process. They must appoint an executive director who is a Singapore resident and maintain a permanent place of business in Singapore.
- Licensed DTSPs will be subject to ongoing regulatory obligations, including informing MAS of significant changes in business operations, undergoing regular audits, and implementing strong compliance frameworks with qualified compliance officers.
- DTSPs must conduct thorough due diligence on their customers, verifying identities and applying enhanced measures for higher-risk transactions, such as those involving anonymous clients or specific jurisdictions.
- MAS proposes further updates to the Singapore’s Financial Services and Markets Notices, including new guidelines on reporting requirements, technology risk management, and cyber hygiene, to ensure DTSPs operate within a secure and transparent environment.
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US SEC Files Market Manipulation Lawsuit Against CLS Global FZC LLC and Andrey Zhorzhes
On 9 October 2024, the United States Securities and Exchange Commission (US SEC) filed a complaint against CLS Global FZC LLC and Andrey Zhorzhes in the U.S. District Court for the District of Massachusetts, alleging a market manipulation scheme involving cryptocurrency assets. The SEC claims that CLS Global falsely presented itself as a market maker while engaging in manipulative practices to inflate trading volume and prices for its clients’ crypto assets, misleading investors.
- Between August 23 and September 18, 2024, CLS Global artificially generated $595,000 in fake trading volume for a crypto asset called NexFundAI on Uniswap, accounting for 98% of the asset’s total trading activity during that period.
- The US SEC accuses CLS Global of engaging in wash trading, a manipulative trading practices that create the illusion of market demand to trick potential investors into believing there is significant organic interest in the assets.
- The FBI conducted a sting operation by creating a fake cryptocurrency project, NexFundAI, to expose bad actors in the crypto market. Zhorzhes and CLS Global, unaware of the FBI’s involvement, agreed to inflate the token’s trading volume for a $4,000 monthly fee paid in Tether.
- CLS Global used 30 wallets to conduct 740 transactions during the specified period, generating the artificial trading activity. These tactics misled the public into believing NexFundAI was a legitimate project with high demand, while the trading activity was fabricated.
- The United States’SEC claims CLS Global’s actions violated multiple provisions of U.S. securities laws, including the United States’ Securities Act of 1933 and the United States’Securities Exchange Act of 1934, which prohibit fraudulent schemes and market manipulation.
- The SEC seeks permanent injunctions, disgorgement of ill-gotten gains, civil penalties, and an order prohibiting the defendants from participating in any securities transactions except for personal accounts.
- Jorge G. Tenreiro, Acting Chief of the United States’ SEC Crypto Asset and Cyber Unit (CACU), in his statement talked about the importance of rooting out manipulation in crypto markets.
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U.S. SEC Files Market Manipulation Lawsuit Against ZM Quant Investment Ltd., Alleging Crypto Market Manipulation and Demanding Jury Trial
On 9 October 2024, the U.S. Securities and Exchange Commission (US SEC) filed a complaint against ZM Quant Investment Ltd., its principals Baijun Ou and Ruiqi Lau, in the United States District Court for the District of Massachusetts. The United States’ SEC accuses ZM Quant of engaging in a scheme to manipulate cryptocurrency asset markets through practices like wash trading, artificially inflating token prices and trading volumes to deceive investors. The US SEC seeks permanent injunctions, disgorgement of profits, civil penalties, and a ban on the defendants’ participation in the securities markets, excluding personal trading.
- ZM Quant, which operated as a market maker since 2018, claimed to support over 1,100 tokens and 2,500 trading pairs. However, the SEC alleges that the firm manipulated these markets by generating artificial trading volume.
- ZM Quant is allegedly involved in wash trading i.e. buying and selling the same asset to create the illusion of high market activity and demand, misleading investors.
- In May 2024, ZM Quant was hired to inflate the trading volume of NexFundAI, a token created by the FBI as part of an undercover operation to expose market manipulation in the crypto space. ZM Quant generated $4,600 in fake trading volume, representing 83.6% of NexFundAI’s activity on Uniswap over a nine-hour period.
- From 2021 to 2023, ZM Quant also manipulated the markets for two other crypto assets, Saitama and SaitaRealty, in exchange for monthly fees. In one instance, ZM Quant inflated SaitaRealty’s trading volume by an extraordinary 412,000,000,000 percent in response to a platform warning about low volume.
- The US SEC alleges violations of U.S. securities laws, including Sections 17(a) of the US Securities Act of 1933 and Sections 9(a)(2) and 10(b) of the US Securities Exchange Act of 1934, as well as United States’ Rule 10b-5, all of which prohibit fraudulent trading practices and market manipulation.
- The US SEC seeks a permanent injunction to prevent ZM Quant from further violating securities laws, disgorgement of all ill-gotten gains, and civil penalties. The US SEC aims to bar the defendants from participating in future securities offerings, except for personal transactions.
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