Quantum Updates 17 | October 2024

United States CFTC Issues No-Action letter to KalshiEX and Kalshi Klear for Transition in Clearing Operations

On 4 October 2024, the United States Commodity Futures Trading Commission (US CFTC) issued a supplemental no-action letter to KalshiEX LLC and Kalshi Klear LLC, exempting them from specific regulatory requirements as they transition their clearing operations from LedgerX LLC to Kalshi Klear LLC. This extension of a 2021 no-action letter provides temporary relief from compliance with certain provisions of the United States Commodity Exchange Act and US CFTC regulations related to reporting and recordkeeping, as Kalshi clears its binary options contracts through Kalshi Klear.

• The US CFTC’s no-action letter grants Kalshi and its clearing entities exemptions from swap data reporting and clearing requirements outlined in US CFTC Regulations 38.8(b), 38.10, 38.951, 39.20(b)(2), and Parts 43 and 45. These regulations cover designated contract markets (DCMs) and derivatives clearing organizations (DCOs).
• Kalshi’s binary options contracts, classified as “swaps” under the Dodd-Frank Act, will now be cleared exclusively through Kalshi Klear LLC following its registration as a DCO on 28 August 2024, replacing LedgerX LLC.
• Kalshi committed to operational safeguards, such as full collateralization of contracts, prompt publication of transaction data, and continued reporting to the US CFTC. The no-action relief is conditional on maintaining these safeguards and ensuring that no third-party clearing members are involved.
• The no-action letter provides regulatory flexibility for Kalshi during this operational transition but does not represent a legal determination regarding the contracts’ legality. Kalshi is still required to comply with other applicable provisions of the Commodity Exchange Act and related US CFTC regulations.

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Cumberland DRW LLC, Subsidiary of DRW Holdings, Faces United States SEC Enforcement Action for Alleged Unregistered Securities Trading

On 10 October 2024, the United States Securities and Exchange Commission filed a complaint against Cumberland DRW LLC in the U.S. District Court for the Northern District of Illinois, alleging the firm engaged in the unregistered sale of securities in the form of crypto assets. Since at least March 2018, Cumberland is alleged to have traded billions of dollars’ worth of crypto assets without registering as a securities dealer, violating Section 15(a) of the Securities Exchange Act of 1934. The SEC claims that Cumberland’s actions deprived investors of essential protections required by U.S. securities laws.

• Cumberland DRW LLC, based in Delaware and operating from Chicago, rebranded from Cumberland Mining & Materials LLC in 2019 and is a subsidiary of DRW Holdings, a financial services firm. Cumberland primarily operates through its trading platform, Marea, which allows it to trade crypto assets for its own account, acting as a market maker.
• The SEC’s complaint alleges that Cumberland’s business model involved capturing spreads between the buy and sell prices of various crypto assets, which the US SEC classified as securities. By failing to register as a securities dealer, Cumberland allegedly violated U.S. securities laws.
• Specific crypto assets Cumberland traded, including MATIC, SOL, ATOM, ALGO, and FIL, are claimed by the US SEC to be securities under U.S. law, making Cumberland’s trading activities illegal without proper registration.
• Cumberland allegedly generated over $400 million in revenue from crypto trading activities during the period in question, while failing to register as required.
• The US SEC seeks a permanent injunction to prevent Cumberland from continuing to operate as an unregistered dealer, disgorgement of all profits made through unregistered trading, prejudgment interest, and civil monetary penalties.
• Jorge G. Tenreiro, Acting Chief of the US SEC’s Crypto Assets and Cyber Unit, emphasized the importance of dealer registration under federal securities laws and highlighted that Cumberland allegedly treated crypto assets as securities, profiting from these transactions without offering market protections required by registration.

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Singapore’s Joint Advisory Warns of Rise in Government Official Impersonation Scam Involving Banks

On 10 October 2024, the Singapore Police Force and the Monetary Authority of Singapore issued a joint advisory warning the public about a surge in scams where criminals impersonate bank officers and government officials. At least 100 cases were reported in September 2024, leading to SG $6.7 million in financial losses. The scammers typically claim suspicious activities in victims’ bank accounts and convince them to transfer money to “safety accounts” under the pretense of aiding an investigation.

• Scammers initiate an unsolicited call posing as bank officers from Singapore’s major banks (DBS, OCBC, UOB, Standard Chartered) and claim suspicious transactions have been detected in the victim’s account. The call is then escalated to a fake government official impersonating the police or Monetary Authority of Singapore (MAS), sometimes via video call, using fake uniforms, badges, and documents to increase credibility.
• Victims are accused of criminal activities such as money laundering and instructed to transfer funds to a “safety account” as part of an investigation. Communication often continues on messaging platforms like WhatsApp, and victims only realize the scam when the perpetrators become unreachable.
• Precautionary Measures recommended by MAS:
  1. Add security features like Two-Factor Authentication or International Call Blocking and use tools like Money Lock to protect bank accounts.
  2. Verify any suspicious activity with trusted sources, and note that the police will never request funds transfer at the beginning of an investigation.
  3. Report scams immediately to the police or banks, block scam accounts, and share information with family and friends to raise awareness.
• The advisory discussed community cooperation and the use of resources like ScamShield to confirm suspicious calls. Victims are encouraged to report incidents to the Police Hotline or make online reports, with confidentiality guaranteed.

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ASIC Publishes 2024 Licensing Reforms: Crypto Assets, BNPL Regulations, and Financial Accountability Among Key Changes

On 11 October 2024, the Australian Securities and Investments Commission (ASIC) released Report 797, outlining licensing reforms across various sectors, including crypto assets, buy-now-pay-later (BNPL) services, and financial accountability. The report highlights ASIC’s licensing and professional registration activities during the 2023–24 financial year and sets out regulatory changes for financial services providers in Australia.

• ASIC proposes to include “digital asset facilities” under the Australian Financial Services (AFS) licensing regime, requiring entities dealing in crypto assets that meet the definition of financial products to apply for an AFS licence to increase consumer protection while supporting innovation. Information Sheet 225 will also be updated to reflect these changes.
• The Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 mandates that BNPL providers must obtain a credit licence under the National Credit Code, bringing BNPL services under the same scrutiny as other credit providers. The reform includes transitional provisions allowing BNPL providers to continue operations while awaiting licence approval.
• ASIC’s reforms seek to regulate currently exempt payment service providers by requiring them to apply for an AFS licence. This move aims to update Australia’s payments system and ensure consistent oversight, particularly in the growing fintech sector.
• Financial Accountability Regime, initially introduced for banks, will extend to the insurance and superannuation sectors in March 2025. Executives in these industries will be subject to new accountability standards, overseen by both ASIC and the Australian Prudential Regulation Authority (APRA).
• ASIC is launching a new AFS licensing portal in 2025 to streamline the application process for Professional Registers and Licensing Portals. It also introduced a beta version of its Professional Registers Search platform, allowing users to verify AFS licensees, credit licensees, and other professionals more efficiently.
• ASIC has adjusted the reportable situations regime, reducing the burden on licensees by extending the notification period and removing the requirement to report certain breaches. The reform aims to balance oversight with operational efficiency.
• Starting in February 2024, financial advisers offering personal advice to retail clients will be required to register with ASIC. Guidance on these new registration requirements has been published to ensure compliance.
•  A revised regime for Foreign Financial Services Providers is set to take effect in 2025, offering streamlined licensing processes and exemptions for international financial service providers operating in Australia.

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Monochrome’s Ethereum ETF Launches, Offering Australia’s First Spot ETH Exposure

On 14 October 2024, Monochrome Asset Management launched Australia’s first spot Ethereum exchange-traded fund (ETF), IETH, on Cboe Australia. The IETH ETF offers unique in-kind Ethereum subscriptions and tax efficiencies via a bare trust structure. The launch follows Monochrome’s successful Bitcoin ETF (IBTC) debut in 2023, which has already garnered $15 million in assets. Trading for IETH is set to begin on 14 October 2024.

• The IETH ETF allows investors direct exposure to Ethereum (ETH), providing a tax-efficient investment option. This launch builds on the success of Monochrome’s Bitcoin ETF (IBTC), introduced in August 2023, which has amassed $15 million in assets under management.
• The IETH ETF has been designed with a unique structure. Unlike U.S.-based ETFs, it features in-kind subscriptions and redemptions, where investors can contribute or redeem Ethereum directly from the fund without triggering a capital gains tax event. This is made possible through its bare trust structure, a legal arrangement that allows investors to maintain both legal and beneficial ownership of the asset.
• Monochrome’s CEO, Jeff Yew, explained that the bare trust structure offers a tax advantage for long-term Ethereum holders. In traditional ETFs, investors face potential capital gains tax when transferring assets, but with a bare trust, investors can transfer their ETH into the fund without this shift in ownership. This structure allows the investment to be treated as if the investor still directly owns the Ethereum, making the ETF an attractive option for those looking to manage their tax liabilities more effectively.
• Monochrome’s Ethereum ETF stands out, especially compared to the U.S. crypto ETF market, which does not offer in-kind redemptions or subscriptions. In contrast to the growing demand for Bitcoin ETFs in the U.S.A, which saw inflows of US $253.6 million as of 11 October 2024, Ethereum ETFs in the U.S. have seen modest outflows which indicates different market dynamics.
• Despite the smaller scale of the Australian market compared to the U.S., Monochrome is optimistic about local demand for cryptocurrency investments. The company aims to attract investors shifting from crypto exchanges to ETFs, and those seeking secure custody solutions. Monochrome hopes to grow its presence by providing easy access to ETH investments through popular brokerage platforms.
• Monochrome IETH ETF offers competitive fees, set at 0.5%, with a reduced rate of 0.21% for accredited advisors. This is in line with the U.S. market rates for similar products, which typically range between 0.20% and 0.25%.

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Hong Kong’s SFC Announces Appointment of Dr. Kelvin Wong Tin-yau as New Chairman

On 14 October 2024, the Hong Kong’s Securities and Futures Commission (HK SFC) announced the appointment of Dr. Kelvin Wong Tin-yau as its new Chairman for a three-year term, starting on 20 October 2024. Dr. Wong will succeed Mr. Tim Lui, who will step down on 19 October 2024, after serving a successful six-year term. Dr. Wong brings a wealth of experience in financial regulations and capital market development to this leadership role. He is currently the Chairman of the Hong Kong’s Accounting and Financial Reporting Council (AFRC), a body that collaborates closely with the HK SFC to ensure the high standards and integrity of Hong Kong’s financial markets. He will continue in this AFRC position until 31 December 2024.

• Between 2012 and 2018, Dr. Wong served as a Non-Executive Director of the Commission and also chaired the Investor Education Centre (now known as the Investor and Financial Education Council) from 2017 to 2018. His deep knowledge of the HK SFC’s policy objectives, strategic priorities, and operational framework will be instrumental in his new role as Chairman.
• Outgoing Chairman Mr. Tim Lui expressed confidence in Dr. Wong’s ability to lead the HK SFC through the next phase of its journey. Mr. Lui highlighted Dr. Wong’s vast expertise in capital markets and his close working relationship with the Commission through his previous roles. Mr. Lui reflected on his own six-year term as one filled with both challenges and achievements, particularly during the global disruptions caused by the Covid-19 pandemic and rising geopolitical tensions.
• Mr. Lui’s legacy is marked by his commitment to market integrity, promoting transparency, and safeguarding investors’ interests, leaving a lasting impact on the organization.
• Dr. Wong, in response to his appointment, expressed his honor and emphasized the importance of maintaining the quality and integrity of Hong Kong’s financial markets. He noted that the HK SFC’s core mission aligns with fostering a sustainable and vibrant capital market, focusing on protecting investor interests, advancing corporate governance, and encouraging innovation in the financial sector.
• Dr. Wong looks forward to working closely with the HK SFC’s Board, CEO Julia Leung, and the broader management team, aiming to build on the HK SFC’s strong foundation, focusing on market development, and addressing emerging challenges in the global financial landscape.
• CEO Ms. Julia Leung welcomed Dr. Wong’s appointment and expressed gratitude for Mr. Lui’s leadership during his term. She noted that the SFC has clear strategic priorities and looks forward to collaborating with Dr. Wong to continue strengthening Hong Kong’s position as a leading international financial center.

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US Court Orders Unsealing of US CFTC Case Against Traders Domain FX LTD, Making All Documents Public

On 11 October 2024, the United States District Court for the Southern District of Florida issued an Order to unseal the case involving the US Commodity Futures Trading Commission (US CFTC) and Traders Domain FX LTD. This order, signed by US District Judge Roy K. Altman, granted the US CFTC’s request to make all documents and docket entries related to the case publicly accessible, removing the prior confidentiality restrictions.

• The US CFTC had filed a complaint against Traders Domain FX LTD on 30 September 2024, accusing the company of fraud, misrepresentation of trading operations, and misappropriation of customer funds. The company and its affiliates are alleged to have engaged in a large-scale fraudulent scheme, soliciting US customers to trade commodities, including gold, and promising substantial profits, with returns claimed to exceed 5,000%. In reality, the defendants used multi-level marketing tactics, diverted funds for personal use, and delayed or denied customer withdrawals starting in August 2022. The company later rebranded as Trubluefx in June 2023, but the issues remained unresolved.
• Some portion of the funds misappropriated by Traders Domain FX LTD came through cryptocurrency wallets. The defendants collected deposits from customers via these wallets, falsely claiming that the funds would be used for legitimate trading. In collaboration with a crypto payment processing firm based in Utah, the company processed over US $16 million in customer deposits, but customers were still unable to withdraw their funds.
• The complaint accuses Traders Domain FX LTD of violating several laws under the US Commodity Exchange Act. These include fraudulent solicitations under Section 4b(a)(2), misappropriation of customer funds under US CFTC Rule 1.1, and operating without proper registration under Section 6m of the US Commodity Exchange Act.
• The US CFTC is seeking legal remedies, including injunctive relief, civil monetary penalties, restitution for defrauded customers, and other equitable relief such as trading bans.
• The US CFTC filed a motion (ECF No. 11) to unseal the case, allowing the public access to previously confidential documents. This motion was granted on 11 October 2024, meaning that all case materials, including the complaint, motions, and other filings, are now available for public review.
• The unsealing of the case allows the public to scrutinize the details of the fraudulent activities. It indicates that the investigation or legal concerns that initially required privacy have been resolved.

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MAS Updates on Settlement Periods, Safeguarding Customer Funds, and Scam Compensation Frameworks

On 15 October 2024, Mr. Gan Kim Yong, Deputy Prime Minister and Chairman of the Monetary Authority of Singapore (MAS), provided written responses in Parliament addressing questions related to payment service providers, e-commerce platforms, and scam compensation frameworks.

• MAS clarified that while e-commerce platforms are not regulated by MAS, licensed payment service providers under the Payment Services Act 2019 must transmit customer funds within specific timeframes: 3 business days for domestic transfers and 7 business days for cross-border transfers. The settlement period for merchants can be mutually agreed upon in writing.
• Licensed major payment institutions are required to safeguard customer monies by either depositing them into a trust account or obtaining a guarantee. The safeguarding must occur by the end of the next business day after receipt or, in the case of e-money, from the time the e-money is issued to the customer.
• The Shared Responsibility Framework (SRF) for phishing scams is expected to be implemented by the end of the year. Public feedback is currently under review, and a formal government response will follow.
• There has been a decrease in malware-enabled scams due to enhanced security measures that block access to banking apps if malware is detected. Banks have goodwill frameworks to support scam victims, particularly for new scam types. MAS expects banks to assess fairly if they fulfilled their obligations and whether the victim acted responsibly.
• Public education on cybersecurity remains a priority, with consumers urged to practice good cyber hygiene to avoid falling victim to scams.

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U.S. SEC Charges Registered Representative for Fraud and Violations of US Regulation Best Interest

On 16 October 2024, the United States Securities and Exchange Commission filed a complaint  against Baris Cabalar, a registered representative at PHX Financial, Inc., for recommending an unsuitable short-term, high-volume trading strategy to eight retail customers. The SEC alleges that Cabalar violated multiple provisions of U.S. securities law, including Section 17(a) of the US Securities Act of 1933, Section 10(b) of the U.S. Securities Exchange Act of 1934, U.S. Rule 10b-5, and U.S. Regulation Best Interest (Reg BI).

• The complaint, filed in the U.S. District Court for the Eastern District of New York, accuses Cabalar of advising frequent, short-term trades to his customers from January 2019 through October 2021. This strategy generated commissions and fees but was unsuitable for his clients, leading to over US $1 million in losses.
• Cabalar and PHX Financial earned more than US $400,000 in commissions during this period. He failed to disclose the high costs associated with the trading, making it unlikely for his customers to achieve any profits.
• The US SEC alleges that Cabalar made misrepresentations to at least one customer, falsely claiming that he could help recover losses, despite knowing the strategy would not yield the necessary returns.
• Cabalar’s actions violated Regulation Best Interest (Reg BI), which requires financial professionals to act in their customers’ best interests. The US SEC claims Cabalar prioritized his own financial interests, recommending excessive trading to generate fees.
• The US SEC is seeking permanent injunctive relief to prevent Cabalar from future misconduct, as well as disgorgement of ill-gotten gains, prejudgment interest, and civil monetary penalties.

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US CFTC Roundtable on Clearing Issues: Focus on Digital Assets and Market Evolution

On 16 October 2024, the United States Commodity Futures Trading Commission’s Division of Clearing and Risk held a roundtable discussion at its headquarters in Washington, D.C., focusing on emerging issues in clearing, particularly related to digital assets. The event brought together industry experts, regulators, and stakeholders to address the evolving landscape of derivatives and financial markets.

• The session began with opening remarks from US CFTC officials, including pre-recorded messages from Chairman Rostin Behnam and Commissioners Summer Mersinger and Caroline D. Pham.
• The first module addressed custody and delivery of digital assets, focusing on the challenges of securely holding and transferring decentralized assets like cryptocurrencies.
• Discussions on use of digital assets as margin in derivatives trading, addressing concerns around volatility, liquidity, and regulatory safeguards.
• The 24/7 nature of digital asset trading was examined, exploring how clearinghouses can adapt to manage risk, liquidity, and real-time margining in continuously operating markets.
• Non-intermediated clearing models, bypassing traditional brokers, were explored, raising questions about risk management, transparency, and regulatory gaps.
• The roundtable also discussed conflicts of interest in vertically integrated entities, emphasizing the need for transparency and fairness in clearing operations.
• The importance of digital asset analytics was highlighted as essential for effective clearing and risk management, given the growing complexity of digital assets.
• Concerns were raised about the shortcomings of the current regulatory framework, particularly in handling risks like custody, margin requirements, and 24/7 trading.
• Participants called for more collaboration between regulators and market participants to proactively address the challenges posed by digital assets.
• While no formal legislative announcements were made, the detailed discussions suggest regulators are considering potential regulatory updates to address the unique risks associated with digital assets.

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ASIC Announces Key Appointments to Executive Leadership Team as Part of Ongoing Transformation

On 17 October 2024, the Australian Securities and Investments Commission (ASIC) announced new appointments to its senior executive leadership team as part of its largest organizational redesign in 15 years. These changes aim to enhance ASIC’s regulatory capabilities and operational agility in response to the evolving financial landscape.

• Peter Soros was appointed as Executive Director of Regulation and Supervision, joining ASIC from AUSTRAC, where he held senior roles, including Deputy CEO and Acting CEO. He will oversee ASIC’s supervision strategies, bringing over 20 years of experience in financial intelligence and regulation.
• Chris Savundra, current General Counsel and Executive Director of Legal Services at ASIC, was named Executive Director of Enforcement and Compliance. Savundra will lead ASIC’s efforts in tackling regulatory misconduct, leveraging his 25 years of legal and litigation experience.
• Earlier in 2024, ASIC appointed Diana Steicke as Executive Director of Registry and Intelligence, Joanne Harper as Executive Director of Data, Digital and Technology, and Annie Reeves as Chief People and Culture Transformation Officer.
• ASIC Chair Joe Longo stated that these leadership changes would strengthen ASIC’s regulatory focus and its ability to address challenges such as anti-money laundering and financial crime prevention. The ongoing transformation is already yielding positive results for the agency.

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