Quantum Updates 19 | October 2024

US Second Circuit Court Issues Default Notice in SEC vs. Ripple Appeal over Procedural Non-Compliance by Ripple’s Legal Team

On 22 October 2024, the U.S. Court of Appeals for the Second Circuit issued a Default Notice concerning procedural non-compliance by Ripple Labs’ legal team. Under Local Rule 12.3, Ripple’s counsel was required to file an Acknowledgment and Notice of Appearance by 18 October 2024 for continued involvement in the appellate process. However, as of the notice date, Ripple’s legal team had not submitted this filing, prompting the court to issue the notice and outline potential restrictions if compliance is not met.

• The court set a deadline of 5 November 2024 for Ripple’s counsel to file the required document. If missed, Ripple’s legal team may lose the automatic right to participate in oral arguments and would need special court permission to present at oral hearings.
• For case inquiries or procedural clarification, the court provided a direct contact line at 212-857-8588.

• Ripple executives Brad Garlinghouse and Chris Larsen have retained Cleary Gottlieb attorneys Nowell Bamberger, Rahul Mukhi, and Samuel Levander to advocate for dismissal of charges.
• The SEC has proposed a deadline of 15 January 2025 for its principal appellate brief, addressing Ripple’s alleged securities law violations linked to XRP sales.
• Attorneys Matthew Solomon and John Deaton, representing XRP holders, are participating as non-admitted counsel, which limits their involvement.
• Ripple’s counterarguments challenge the US SEC’s stance on what constitutes an “investment contract,” with Ripple arguing that such a contract doesn’t necessitate a formal agreement, post-sale obligations, or profit reliance on the seller’s activities.
  Ripple has revived its fair notice defense, asserting that the US SEC’s regulatory framework for cryptocurrencies lacked sufficient clarity.

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Latvia Fintech Forum 2024: Sector Development and Global Trends to Be Explored in Riga on 5 November 2024

On 23 October 2024, Latvijas Banka announced the Latvia Fintech Forum 2024, scheduled for 5 November in Riga. Now in its third year, the forum will bring together around 250 representatives from the fintech sector, including key figures from the Baltics and Europe, to discuss Latvia’s fintech developments and global trends shaping the industry.

• Organised by Latvijas Banka in collaboration with the Investment and Development Agency of Latvia (LIAA) and the Investment and Tourism Agency of Riga (RITA), the forum aims to drive innovation and foster connections among fintech entrepreneurs, policymakers, and investors.
• The forum will be inaugurated by Latvia’s Minister of Economics, Viktors Valainis, who will address the strategic potential of the fintech sector to boost Latvia’s economy as approximately 25% of Latvian start-ups operate in fintech.

The forum’s agenda includes three main panel discussions:

• First Panel: Focused on the achievements and future strategy of Latvia’s fintech industry, with insights from figures like Governor Mārtiņš Kazāks of Latvijas Banka and other industry leaders. The panel will discuss the need for a renewed national fintech strategy and emphasise Riga’s supportive regulatory environment and talent pool for sustaining fintech growth.
• Second Panel: Analysing global fintech trends, especially emerging technologies such as artificial intelligence (AI), which is reshaping financial services through operational efficiencies, enhanced customer experiences, and data-driven insights.
• Third Panel: Examining the applications and challenges of AI within finance, with discussions on responsible integration of AI, regulatory requirements, and ethical considerations.
• A fintech start-up competition organised by Tenity, where emerging fintech start-ups will present pitches to an audience of industry leaders and investors. The competition includes an award ceremony to recognise the most promising start-ups, providing visibility and potential investment opportunities.
• The forum will conclude with a networking session at Mazā Ģilde, offering participants the chance to engage with industry peers and explore potential partnerships.

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US SEC Commissioner Mark T. Uyeda Addresses Regulatory and Financial Market Challenges at the AIMA APAC Annual Forum

On 24 October 2024, U.S. SEC Commissioner Mark T. Uyeda addressed the AIMA APAC Annual Forum in Hong Kong, focusing on the Indo-Pacific’s growing role in the global economy, the significance of cross-border cooperation, and the need to foster trust through high regulatory standards, free-market principles, and intellectual property rights protections. Uyeda highlighted the potential of Indo-Pacific integration to drive investment, economic growth, and stability.

• Mark T. Uyeda addressed concerns over alternative investments, contesting the notion that private funds represent a “shadow banking” risk to financial stability. He elaborated that post-2008, private capital, including private equity and credit, has filled a necessary funding role for startups and innovative sectors, where traditional banks are limited. He opposed overly stringent regulations on private funds, pointing to a U.S. appeals court decision in June 2024 that vacated certain SEC rules on private funds, suggesting the need for the SEC to respect its regulatory boundaries.
• Discussing crypto and fintech, Uyeda criticized the SEC’s lack of clear guidelines for defining crypto assets as securities, which he argued creates ambiguity and discourages innovation. He noted that the current registration process, relying on frameworks like Form S-1, fails to address the unique characteristics of digital assets. Uyeda called for tailored regulatory guidelines to encourage capital formation and protect investors more effectively.
• Mark T. Uyeda praised the proactive approaches of Indo-Pacific regulators, noting initiatives such as Hong Kong’s stablecoin licensing, Singapore’s fintech programs, Japan’s guidelines for crypto exchanges, and Australia’s regulatory sandbox. He commended these nations for balancing investor protection with fostering fintech innovation and suggested that the U.S. could learn from their open regulatory engagement.
• He discussed the importance of global regulatory collaboration, especially through forums like IOSCO and the FSB, while cautioning that these organisations often rely on European prudential models that may not align with global market growth needs. Uyeda advocated for more Indo-Pacific perspectives in these forums to provide balanced input on issues like leverage, crypto, and derivatives.
• Mark T. Uyeda closed by encouraging greater involvement of Indo-Pacific countries in international regulatory discussions, that their viewpoints on emerging finance could help shape a balanced, growth-oriented global regulatory framework that respects both innovation and stability. He praised AIMA’s role in these dialogues and encouraged stakeholders to continue shaping the alternative investment landscape on a global scale.

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Singapore Enforces New Shared Responsibility Framework, Strengthening Consumer Protection Against Phishing Scams in Financial and Telecom Sectors

On 24 October 2024, the Monetary Authority of Singapore (MAS) and Infocomm Media Development Authority (IMDA) introduced the Shared Responsibility Framework (SRF) to enforce stringent anti-scam duties for Financial Institutions (FIs) and Telecommunication operators (Telcos). The SRF requires these entities to meet specific standards, holding them financially accountable for scam losses if they fail to comply. This new framework aims to enhance consumer protection and bolster trust across Singapore’s digital ecosystem.

• The SRF was developed after a year-long consultation, gathering input on improving accountability amidst rising phishing attacks. It uses a “waterfall” approach to designate responsibility, requiring FIs and Telcos to compensate consumers for losses if duties are unmet.
• Financial Institutions are assigned five primary duties:
  • A 12-hour cooling-off period after activating digital security tokens to allow time to detect unauthorised activities.
  • Real-time notifications for high-risk activities, including new device logins and payee additions.
  • Immediate alerts for outgoing transactions to enable prompt consumer action.
  • A 24/7 reporting channel and a “kill switch” for consumers to halt unauthorised account access.
  • Real-time fraud surveillance, particularly for high-value transactions, to intercept suspicious activities swiftly.
• Telcos’ three core responsibilities include:
  • Only delivering Sender ID SMS from authorised aggregators.
  • Blocking all unauthorised Sender ID SMS messages.
  • Filtering SMS containing malicious URLs to counter phishing scams targeting SMS channels.
• The “waterfall” model prioritises FI accountability, with Telcos in a secondary role. This approach emphasises the custodial role of FIs over consumer funds and the supportive role of Telcos in secure communication.
• The SRF provides a four-stage claims process: submission, investigation, outcome communication, and recourse, with FIs acting as the main consumer contact point. This setup ensures a streamlined experience for consumers seeking compensation for unauthorised transactions.
• MAS and IMDA will continuously review the SRF, considering stakeholder feedback to expand its scope to other digital service providers, like messaging platforms, as scam tactics evolve.

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MAS Announces 2024 Global FinTech Hackcelerator and FinTech Excellence Awards Finalists

On 28 October 2024, the Monetary Authority of Singapore (MAS) revealed the 42 finalists for the 2024 Global FinTech Hackcelerator and SFF FinTech Excellence Awards. Winners will be announced at the SFF FinTech Excellence Awards dinner on 7 November 2024, spotlighting innovations that advance financial health and resilience.

• The Global FinTech Hackcelerator theme, “Improving Financial Health,” attracted participants from over 10 countries, with projects focused on AI, blockchain, and digital tools for financial accessibility and efficiency.
• Eighteen finalists, covering themes like open banking and financial literacy, will pitch their solutions at the Singapore FinTech Festival, with top winners awarded cash prizes.
• The FinTech Excellence Awards, co-organised with the Singapore FinTech Association and PwC Singapore, feature categories on emerging technologies, financial inclusion, regulatory leadership, sustainable innovation, and new thematic areas like AI and Quantum technology.
• The Hackcelerator finalists come from various countries, including Australia, India, and the U.S. Finalists will engage in a mentorship program before pitching to judges on 6 November, competing for SG$20,000 and a top prize of SG$50,000 for the winning three.
• The Excellence Awards drew over 200 entries, evaluated by an international panel based on originality and real-world impact. Corporate categories received 175 submissions, while the FinTech Mentor Award saw 29 entries.
• Companies like Ripple, ADVANCE.AI, and Crypto.com are backing the ‘FinTech Gives Back’ initiative, offering resources to support emerging talents and the advancement of the FinTech ecosystem.
• Sopnendu Mohanty, Chief FinTech Officer at MAS, commended the finalists for shaping a dynamic, inclusive FinTech future, appreciating their innovative solutions and support for the ‘FinTech Gives Back’ initiative. Ms. Wong Wanyi, FinTech Leader at PwC Singapore, noted the importance of quantum computing and AI as transformative technologies.

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Dr. Eric Yip Unveils Hong Kong’s Vision for a Regulated Virtual Asset Market at FinTech Week 2024

On 28 October 2024, Dr. Eric Yip, Executive Director of Intermediaries at the Securities and Futures Commission (HK SFC) in Hong Kong, outlined Hong Kong’s regulatory strategy for virtual assets during his speech at FinTech Week. Dr. Yip emphasised a balanced approach that fosters market development while prioritising investor protection, showcasing Hong Kong’s pragmatic vision for integrating virtual assets into its financial sector.

• Dr. Yip noted that virtual assets are increasingly central to financial regulators, given their high trading volumes, young investor demographic, and impact on market stability.
• He identified two trends aiding market stability: global law enforcement scrutiny, which pressures market participants to remain compliant, and a convergence of traditional finance principles with Web3, introducing anti-money laundering (AML) and client suitability measures into the virtual asset space.
• Hong Kong’s regulatory principle, “same business, same risks, same rules,” applies established securities frameworks to virtual asset markets, focusing on resilience while ensuring adaptability for industry evolution.
• Adressing VATP Licensing Progress, he stated that since June 2024, three Virtual Asset Trading Platforms (VATPs) have received licenses, with 14 more applications under review. The licensing involves a three-phase compliance inspection focused on asset security, cybersecurity, and AML practices.
• A consultative panel with senior VATP leaders will launch in early 2025 to foster industry dialogue and develop a roadmap for investor protection and market growth. Insights from these discussions will be documented in a comprehensive white paper.
• Future Regulatory Enhancements: Planned improvements will address liquidity support and efficient asset custody, drawing from traditional securities markets. Ongoing consultations with the virtual asset community aim to enhance Hong Kong’s regulatory framework further.
• Project Ensemble: A standardised settlement framework for tokenised assets, now under trial in a sandbox environment, includes innovations like tokenised deposits. The Hong Kong Monetary Authority (HKMA) will introduce a stablecoin regime by 2025, aiming to streamline settlement processes.
• Investor Safeguards: With an emphasis on cybersecurity, cryptographic tracing, and public education, the HK SFC has launched initiatives to alert investors about scams and suspicious platforms, addressing virtual asset risks faced by younger investors.

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US CFTC Commissioner Pham Announces Global Markets Advisory Committee (GMAC) Meeting on 21 November 2024

On 28 October 2024, U.S. Commodity Futures Trading Commission (CFTC) Commissioner Caroline D. Pham announced a virtual public meeting of the Global Markets Advisory Committee (GMAC) set for 21 November 2024. This meeting will address advancements in digital asset markets, including tokenised collateral and regulatory frameworks for utility tokens, accessible via a live webcast on the CFTC website and audio options.

• The meeting is accessible via live webcast on the CFTC website and through audio.
• Commissioner Pham discussed and applauded the GMAC’s commitment to adapting regulatory frameworks for emerging technologies, particularly the use of tokenised collateral to improve efficiency and manage risks, as well as developing regulatory approaches for utility tokens.
• Preceding the GMAC meeting, an open CFTC meeting on 29 October 2024 will gather stakeholders and regulatory experts at CFTC Headquarters in Washington, D.C., to finalise important rules on operational resilience, customer fund investment, and recovery plans for Derivatives Clearing Organisations (DCOs).
• The 29 October meeting will also address executive and supervisor compensation structures to support effective financial oversight.
• During the GMAC session on 21 November, a Digital Asset Markets Subcommittee recommendation will be presented, featuring BNY Mellon and Franklin Templeton’s exploration of DLT for non-cash collateral, aimed at boosting collateral management efficiency and security.
• Chris Perkins of CoinFund will lead a presentation focused on defining utility tokens and providing market guidance, addressing unique regulatory and operational challenges.
• The public can attend the GMAC meeting via the CFTC website or YouTube channel, with an audio webinar ID and passcode available for access.
• For further information, Harry Jung is the GMAC Designated Federal Officer, and Nicholas Elliot serves as the Alternate.

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Hong Kong SFC Reports Major Development in Tokenised Asset Management Pilot within Project Ensemble Sandbox

On 28 October 2024, the Hong Kong Securities and Futures Commission (HK SFC) announced significant progress in its Project Ensemble Sandbox, a fintech testing environment created with the Hong Kong Monetary Authority (HKMA). This advancement featured a local financial institution’s successful trial of a tokenised money market fund (MMF) using tokenised deposits (TD), marking an early evaluation of tokenisation’s potential to streamline asset management operations and reduce costs.

• Launched in August 2024, Project Ensemble Sandbox provides a controlled setting for financial institutions to test digital innovations, particularly blockchain and tokenisation models, across various financial scenarios with regulatory oversight from the HK SFC and HKMA.
• In this trial, the financial institution tested a tokenised MMF designed for institutional clients, covering subscription, redemption, and cross-bank settlement to simulate the entire asset management lifecycle.
• A comprehensive delivery-versus-payment (DvP) settlement process was employed to reduce risks by ensuring concurrent asset transfers, mitigating potential settlement risks like counterparty defaults.
• The pilot introduced atomic settlement, a technology enabling transactions to be completed instantaneously, irreversibly, and 24/7, aligning with the global needs of international clients and reducing costs by removing settlement timing gaps.
• Atomic settlement, with its immediate finality, emphasises the need for precise regulatory frameworks, including advanced cybersecurity and real-time monitoring, given its limitations in handling disputes or errors post-transaction.
• Christina Choi, Executive Director of Investment Products at HK SFC, highlighted that insights from Sandbox trials provide regulators with practical data on how tokenisation can be effectively scaled within a regulated framework.
• The HK SFC and HKMA continue to support asset managers and financial institutions in exploring tokenisation, aiming to develop a compliant, innovation-friendly ecosystem that upholds Hong Kong’s regulatory standards.
• Project Ensemble Sandbox’s real-world tests of atomic settlement and DvP models contribute to Hong Kong’s role in setting international standards for tokenisation, likely impacting global regulatory approaches to digital asset management.

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BIS and Central Banks Showcase Embedded Compliance for Cross-Border Transactions in Project Mandala

On 28 October 2024, the Bank for International Settlements (BIS) and central banks from Australia, Korea, Malaysia, and Singapore announced a breakthrough in Project Mandala, demonstrating the feasibility of embedding compliance protocols directly into cross-border payment systems. This compliance-by-design model automates regulatory adherence within transaction processes, aiming to streamline international transactions while maintaining regulatory standards across jurisdictions.

• Project Mandala, led by the BIS Innovation Hub Singapore Centre and partnered with central banks including the Reserve Bank of Australia (RBA), Bank of Korea (BOK), Bank Negara Malaysia (BNM), and the Monetary Authority of Singapore (MAS), seeks to simplify compliance for cross-border payments and aligns with the G20’s priorities.
• The project achieved a proof-of-concept milestone by embedding programmable compliance features into the transaction system, enabling real-time adherence to regulations without compromising data privacy or regulatory requirements.
• Benefits of Project Mandala include reduced costs, increased transaction speed, enhanced transparency, and easier regulatory monitoring, which reduces the likelihood of compliance breaches.
• Utilising a decentralised infrastructure, the system comprises a peer-to-peer messaging setup, a rules engine, and a proof engine to verify compliance before transactions are processed. This approach generates a compliance proof without revealing sensitive customer data, supporting secure and efficient transactions.
• The proof of concept validated two main use cases:
  • Cross-border lending between Singapore and Malaysia, facilitating compliance for capital flow management and sanctions checks with real-time central bank oversight.
  • Cross-border financing for capital investments between South Korea and Australia, automating compliance checks for unlisted securities transactions.
• Mandala’s dual compatibility supports both digital assets (including CBDCs) and traditional financial systems like Swift, allowing programmable compliance through smart contracts, making it adaptable to evolving financial frameworks.

• Project Mandala’s model promises a unified approach for cross-border compliance, aligning with global regulatory standards, and positioning central banks to better manage international financial flows.

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