Quantum Updates 18 | October 2024

Gary Gensler, US SEC Chair Discusses AI, Fraud, and Investor Protection in Securities Law

On 10 October 2024, Gary Gensler, Chair of the United States Securities and Exchange Commission (US SEC), addressed the growing risks of fraud in relation to artificial intelligence (AI) and its application in finance. In his statement he discussed and emphasised that while AI presents opportunities, it also introduces new challenges for investor protection, with a focus on three categories of harm: programmable, predictable, and unpredictable.

• Gensler began by referencing Alan Turing’s question “Can machines think?” to reference AI’s relevance in modern securities law, stressing that fraud remains fraud regardless of the tools used.
• Gensler explained that Programmable Harm occurs when algorithms are intentionally designed to deceive, which constitutes fraud under US securities law.
• Predictable Harm as the name explains, are those risks where harm is not programmed but could be foreseen, stressing the need for firms to act reasonably and prevent reckless use of AI, likening it to illegal practices like front-running and spoofing.
• While elaborating on Unpredictable Harm, which involves unforeseen risks due to AI’s self-learning capabilities. Gensler elaborated and acknowledged the complexity of holding firms accountable for such harms but concluded that investor protection must remain a priority.
• Gensler emphasised that firms must prepare and implement safeguards for AI deployment, regardless of the evolving nature of the technology, to avoid negligence.
• He concluded by citing Joseph Kennedy’s stance against fraud, taking a strong stance that the US SEC will remain vigilant against fraud, whether perpetrated by humans or AI systems.

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DIFC Courts Launches New Suite of Digital Services, Including Digital Assets Will at GITEX Global 2024

On 15 October 2024, the Dubai International Financial Centre (DIFC) Courts announced the launch of digital services as Digital Assets Will at GITEX Global 2024. This service allows individuals to distribute their digital assets securely through a non-custodial wallet, using Hedera Distributed Ledger Technology (DLT). The Digital Assets Will includes assets such as Ethereum Classic (ETH), Bitcoin (BTC), Matic, USD Coin (USDC), Tether (USDT), Hedera (HBAR), and Hedera Token Service (HTS), allowing users to maintain control over their assets during their lifetime and allocate them as ‘specific gifts’ upon the Testator’s passing.

• The Digital Assets Will complements existing DIFC Courts Wills, which cover property, financial assets, business owners, and guardianship.
• The entire process, from drafting to registration, is digitised and accessible globally, with users choosing between Single or Mirror Wills, costing AED 5,000 and AED 7,500 respectively.
• Registration involves an online process followed by video conferencing for electronic signing and storage in the DIFC Courts’ secure database.
• A Digital Notary Service was also launched, powered by Hedera Blockchain, enabling notarisation of English documents, ensuring integrity through timestamped DLT records.
• The DIFC Courts introduced a Mediation Service Centre, offering digital alternative dispute resolution through AI-enabled systems.
• Justice Omar Al Mheiri stated: “The DIFC Courts, together with its public and private sector partners, is proud to spearhead some of the UAE’s most progressive government legal services, supported by smart technology implementations.” in line with Dubai’s economic and digital strategy.
• The initiative is supported by partners such as The Hashgraph Association, Deca4 Advisory, and DataFlow Group.

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Latvijas Banka Opens Access to Electronic Clearing System for Non-Bank Payment Service Providers

On 16 October 2024, Latvijas Banka announced that it has finalised preparations to grant non-bank payment service providers, including licensed payment and electronic money institutions, direct access to its Electronic Clearing System (EKS). This allows non-bank entities to facilitate instant payments and financial transactions across the Single Euro Payments Area (SEPA) and within the European Union and European Economic Area.

• Previously, direct access to the EKS was restricted to credit institutions and the Treasury.
• From 17 October 2024, non-bank payment service providers will be able to participate in the system, to update payment services in Latvia.
• Latvijas Banka’s Governor, Mārtiņš Kazāks, stated: “This is an important step towards facilitating the development of payment services in Latvia, giving equal opportunities to all payment service providers in Latvia, and expanding opportunities for the population and companies to use state-of-the-art and innovative payment services.”
• To join the EKS, non-bank providers must conclude a formal agreement with Latvijas Banka, ensure technical readiness, and undergo mandatory testing. Full guidance is available on Latvijas Banka’s website.
• Amendments to the Regulation on the Participation Procedure in the EKS, adopted on 14 October 2024, legally support the inclusion of non-bank providers, in line with recent legislative changes to Latvia’s payment services laws.
• While the current framework does not cover cryptocurrencies, there is speculation about potential future integration of digital currencies, pending further consultation and evaluation by Latvijas Banka.

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Australian Federal Court Rules Harvey Norman and Latitude Misled Consumers in Advertising Campaign

On 18 October 2024, the Australian Federal Court, in its judgment ruled that Harvey Norman Holdings Ltd and Latitude Finance Australia engaged in misleading conduct and made false representations regarding a widely promoted 60-month interest-free and no deposit payment method. The case, brought by the Australian Securities and Investments Commission (ASIC), alleged that the advertising campaign did not clearly disclose the full terms and conditions, leading to consumer misunderstanding.

• The advertisements, run between January 2020 and August 2021, promoted an interest-free payment method but failed to inform consumers that they would need to apply for and use a Latitude GO Mastercard or another Latitude credit card to benefit from the offer.
• ASIC raised concerns that the financial implications, including credit card fees, were not adequately disclosed. These fees included establishment charges (until March 2021) and ongoing monthly service fees if the statement balance exceeded $10.
• ASIC argued that the ads misled consumers by omitting crucial details, leading them to believe the offer was straightforward when, in reality, it involved entering into a complex credit contract.
• Justice Yates ruled that Harvey Norman and Latitude breached provisions of the ASIC Act by failing to clearly communicate the true cost of the “interest-free” offer, noting that consumers could pay significantly more than expected.
• Following the ruling, ASIC will seek pecuniary penalties and other relief against both Harvey Norman and Latitude.

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Managing External Shocks: Asia’s Experience with Capital Flows – Remarks by Edward Robinson at 2024 Beijing Financial Street Forum

On 18 October 2024, Edward Robinson, Deputy Managing Director (Economic Policy) and Chief Economist at the Monetary Authority of Singapore (MAS), delivered a speech at the 2024 Beijing Financial Street Forum, discussing Asia’s strategies for managing external shocks, particularly concerning capital flows. His remarks centered on how Asia’s economies can navigate evolving global financial conditions while preserving macroeconomic stability.

• Robinson began by reflecting on the shifting dynamics in the global economy and global disruptions like the Covid-19 pandemic, supply chain issues, and interest rate changes in advanced economies, noting the potential for easing interest rates in the U.S. and Europe to benefit Asian economies.
• He warned that while easing interest rates present opportunities, risks like inflation and a global recession persist, with capital flows playing an important role in transmitting these shocks across economies.
• Robinson discussed the “global financial cycle,” where economic conditions in advanced economies influence financial stability in emerging markets, leading to volatility in capital flows.
• He pointed out that Asian economies have gained policy autonomy, managing global financial cycles more effectively during recent monetary tightening, partly due to preemptive actions to contain inflation.
• These economies strengthened their resilience through positive foreign direct investment, strong current accounts, and deepening local currency asset markets, reducing reliance on foreign capital and mitigating external shocks.
• MAS research showed a reduction in the influence of global financial cycles on capital flows to Asia, with external factors accounting for less capital flow variation compared to 15 years ago.
• Robinson also discussed the importance of inflation targeting, fiscal policies, and foreign reserves to manage capital flows and protect financial systems from sudden outflows.
• Singapore’s dual mandate for monetary and macroprudential policy, using exchange rate-based monetary policy and macroprudential measures to manage volatile capital flows and ensure financial stability.
• Robinson concluded by stressing the need for international cooperation, citing that domestic policies alone are insufficient to shield economies from global shocks, and cooperative measures like swap lines and liquidity support are vital for stability.

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Joint Statement on Enhanced Timeframe for New Listing Applications Announced by HK SFC and HKEX

On 18 October 2024, the Hong Kong Securities and Futures Commission (HK SFC) and The Stock Exchange of Hong Kong Limited (HKEX) introduced an Enhanced Timeframe for the New Listing application process, aiming to improve transparency, efficiency, and clarity for prospective issuers. This new initiative builds on prior efforts to streamline the listing process while maintaining quality and public interest.

• Since 2023, the HK SFC and HKEX have consolidated relevant guidance and published vetting statistics for the listing process.
• The Enhanced Timeframe sets a maximum of two rounds of regulatory comments from the HK SFC and the Exchange, with each regulator’s review period capped at 40 business days.
• Applicants must resolve concerns and finalise listing documents within 60 business days, completing the entire process within a six-month validity period.
• Eligible A-share listed companies with a market capitalisation of HK$10 billion and compliance with listing regulations for two years can opt for an Accelerated Timeframe, reducing review to one round of comments within 30 business days.
• In cases of regulatory concerns, the standard review process will apply, and regulators may issue requisition letters, extending the process.

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UK FCA Publishes Blog on Cryptoasset Registrations: Building Strong Foundations for the Future

On 18 October 2024, Val Smith, Head of Payments and Digital Assets at the UK’s Financial Conduct Authority (UK FCA), published a blog discussing UK FCA’s approach to crypto firm registrations under the Money Laundering Regulations (MLRs). Val Smith’s concerns about the perceived stringency of the registration process and the importance of maintaining high standards to protect consumers and ensure the integrity of financial markets.

• Val Smith acknowledged criticisms that the UK FCA’s standards for crypto firms may seem strict but he supported it with the UK FCA’s primary goal is to combat financial crime, such as money laundering and terrorism financing.
• The UK FCA seeks to prevent a “race to the bottom” by ensuring the crypto sector grows on solid, trusted foundations, fostering sustainable and secure innovation.
• Smith stressed the importance of trust in the financial system and noted that the UK FCA supports crypto firms by offering guidance, pre-application meetings, and practical assistance to navigate the regulatory process.
• Each registration application is assessed individually, considering the firm’s systems, operational environment, people, and target customers, leading to variations in processing times based on complexity.
• The UK FCA remains focused on protecting consumers and the financial system by upholding high standards, by compliance of required standards, while filtering out those that pose a risk.

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UK FCA Imposes Restriction on Business Agent Limited after Second Supervisory Notice

On 22 October 2024, the United Kingdom’s Financial Conduct Authority (UK FCA) imposed restrictions on Business Agent Limited, halting its regulated activities due to concerns over client fund management and non-compliance with regulatory standards, particularly on its Nextcrowd platform. The action follows the Second Supervisory Notice issued on 10 September 2024, due to the the firm’s non compliance regarding client money management, violations of UK ISA regulations, and due diligence lapses.

• The UK FCA’s concerns, initially raised in a First Supervisory Notice on 22 July 2024, remained unresolved despite the firm’s representations.
• Business Agent Limited was found to have mishandled client funds, violating UK Client Money Asset Sourcebook (CASS) rules, and had not set up ISA subscriptions correctly.
• The firm lacked effective systems to manage conflicts of interest and failed to conduct proper due diligence on investments listed on its platform.
• Relief sought by imposing restrictions which include prohibiting Business Agent Limited from conducting any regulated activities without prior approval from the UK FCA, halting its operations, and mandating transparency about these restrictions with clients and financial service providers.
• Business Agent Limited was also stripped of its role as an ISA Manager, with investors advised to contact the firm regarding their investments.
• The UK FCA’s action was due to Business Agent Limited’s failure to meet Threshold Conditions under the UK’s Financial Services and Markets Act 2000, posing risks to consumers and the financial market.

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US CFTC to Hold a Commission Open Meeting on 29 October 2024

On 22 October 2024, the U.S. Commodity Futures Trading Commission (US CFTC) announced an open meeting scheduled for 29 October 2024, from 10:00 a.m. to 4:30 p.m. EDT at its Washington, D.C. headquarters. The meeting will cover regulatory matters including final rules related to operational resilience for futures commission merchants, swap dealers, and major swap participants. The public can attend in person or virtually via live stream on the US CFTC’s website or YouTube channel.

• The meeting, chaired by US CFTC Chairman Rostin Behnam, will be open to the public with options to attend in person, by phone, or online.
• The agenda for discussion includes the Final Rule on Operational Resilience Framework for futures commission merchants, swap dealers, and major swap participants, focusing on systems to withstand operational disruptions.
• A review of the Final Rule on the Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organisations will also be conducted to ensure customer assets are safeguarded.
• The US CFTC will discuss the Final Rule on Derivatives Clearing Organisations’ Recovery and Orderly Wind-down Plans, aimed at managing financial distress and ensuring continuity of functions.
• Updates on the Commission’s Fall 2024 Unified Agenda Submission, detailing future regulatory priorities, will be provided.
• The meeting will also address US CFTC Executive and Supervisor Compensation Structures and the importance of maintaining leadership within the agency.
• All materials presented during the meeting will be made available online, with instructions for virtual participation provided on the US CFTC’s website.

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UK FCA Launches Crackdown on Illegal Finfluencers for alleged Targeting of Young Investors

On 22 October 2024, the United Kingdom’s Financial Conduct Authority (UK FCA) announced a crackdown on 20 social media “finfluencers” as part of efforts to combat illegal financial promotions targeting young investors. The UK FCA issued 38 alerts against social media accounts promoting financial products unlawfully and began interviewing several finfluencers under caution.

• Finfluencers have gained popularity for promoting high-risk financial products to young audiences, many of whom are vulnerable to impulsive financial decisions.
• The UK FCA’s concerns is the lack of authorisation for many finfluencers, despite their significant influence over young followers, with nearly 62% of 18- to 29-year-olds trusting these influencers.
• These finfluencers often promote Contracts for Difference (CFDs), a highly leveraged and speculative investment product that can lead to significant financial losses.
• The crackdown follows an investigation into illegal financial promotions on social media, with several individuals facing charges for promoting unauthorised schemes on Instagram.
• The UK FCA has outlined the responsibility of finfluencers to ensure they are not promoting financial products unlawfully, and the authority is focused on protecting consumers from being misled into high-risk investments.
• Ongoing court proceedings involve charges against multiple influencers for breaching the United Kingdom’s Financial Services and Markets Act 2000, which prohibits unauthorised financial promotions.
• Among those charged was Emmanuel Nwanze, accused of running an unauthorised investment scheme and promoting it through the Instagram account @holly_fxtrends. According to the UK FCA, Nwanze and Holly Thompson, another defendant, provided advice on buying and selling CFDs without the necessary UK FCA authorisation.
• The UK FCA urges consumers and investors to check its warning list before making financial decisions and to consult its InvestSmart page for guidance on safer investments.
• Steve Smart, joint executive director of enforcement and market oversight at the UK FCA, discussed the responsibility these influencers carry, stating, ‘Finfluencers are trusted by the people who follow them, often young and potentially vulnerable people attracted to the lifestyle they flaunt.’ He added ‘Finfluencers need to check the products they promote to ensure they are not breaking the law and putting their followers’ livelihoods and life savings at risk

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Denmark’s Tax Law Council Proposes Consistent Taxation Framework for Crypto Assets

On 23 October 2024, the Danish Tax Law Council published a comprehensive report recommending changes to the taxation of crypto assets in Denmark. The report, “Finansielle Kryptoaktiver“ addresses the need for a standardised tax framework to accommodate the growing number of Danish crypto investors, with legislative proposals expected by early 2025.

• The report discusses the current inconsistencies in crypto taxation, where investments are taxed under various regimes, creating confusion among investors and complicating tax calculations.
• Crypto assets, including cryptocurrencies, stablecoins, and utility tokens, are defined, with explanations of the underlying distributed ledger technology (DLT) and mechanisms like Proof of Work (PoW) and Proof of Stake (PoS).
• The Council recommends a mark-to-market taxation model, taxing the value of crypto assets annually, allowing for gains to be taxed and losses to be deducted, to simplify tax reporting for frequent traders.
• Issues such as liquidity concerns from unrealised gains and specific cases like blockchain forks and airdrops are addressed, recommending taxation only when assets are sold and gains are realised.
• The report elaborates on Denmark’s need to align its crypto tax laws with international frameworks, particularly the EU’s MiCA regulation and DAC8 directive, for harmonised crypto regulation and tax transparency across Europe.
• Legislative changes are expected in early 2025, with new tax rules likely to take effect by 1 January 2026, mandating crypto exchanges to report customer activities and adopting global standards for better tax compliance and transparency.

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