by Iulia Vasile | Dec 8, 2022 | News
In Hong Kong, virtual asset service providers will have a new licensing system, which will require them to adhere to strict anti-money laundering (AML) guidelines.
Hong Kong’s legislative body has approved a new amendment to the anti-money laundering and terrorist financing system. The legislation now includes virtual asset service providers.
On June 1, 2023, this new legislation will go into effect, and it will establish a licensing system for virtual asset service providers. Crypto exchange service providers will be subject to the same legislation that currently applies to traditional financial institutions.
Virtual exchanges that want to open a Hong Kong business must follow strict AML(Anti-Money Laundering) guidelines and comply with investor protection laws before being granted a license to operate. Hong Kong, unlike other regulators around the globe, has used the FTX crash to reduce regulatory risks associated with centralized exchanges.
Regulators around the globe have been criticized for failing to protect retail investors after the FTX crypto exchange collapse. A growing demand has emerged to bring crypto exchanges under the law and to require strict AML and investor protection.
Hong Kong Monetary Authority to impose regulations
Hong Kong has actively worked toward the establishment of a well-thought regulatory framework for its nascent cryptocurrency market. The Hong Kong government published a policy in October entitled “Policy Declaration on the Development of Virtual Assets.” It included a regulatory framework as well as risk-based regulatory guidance. To evaluate and improve the technology underlying virtual assets, the government suggested several pilot projects.
Investors may also benefit from some protection regulations. This nation has become the leader in the urgent issue of investor protection because of the recent legislation amendment.
At a recent conference, Eddie Yue, chief executive of the Hong Kong Monetary Authority, suggested that there might soon be investor protection regulations in the country.
Banks are discussing the future of FinTech
Central bank governors from all over the world have attended a conference in Thailand to discuss the role and future of central banks in the face of evolving financial technology. The conference was hosted by both the Bank of Thailand and the Bank for International Settlements.
Panel discussion on digitalized monetary systems featured Eddie Yue (chief executive of Hong Kong Monetary Authority), Changyong Rhee (governor of the Bank of Korea), Adrian Orr (governor of the Reserve Bank of New Zealand), Cecilia Skingsley (Bank for International Settlements) discussing the rise of digital assets, central banks digital currencies, and the potential risks associated with this new technology.
The chief of the Hong Kong Monetary Authority discussed the benefits and innovations of blockchain technology, as well as its potential impact on central banks. Yue stated that stablecoins and CBDCs would offer more efficient and economical ways to transact in the long term. He noted, however, that any new technology comes with certain risks. These risks could be operational.
Yue pointed out that blockchain is decentralized by its very nature. It is, therefore, much more difficult to mitigate on-chain risk. Regulators should therefore focus on activities off-chain. He explained:
“We can start with regulating off-chain activities like regulating virtual asset exchanges. Hong Kong will soon introduce not just AML (anti-money laundering) aspect but also investor protection.”
This was before the Hong Kong government issued the regulations for crypto exchanges, which align with the international consensus on regulating stablecoins.
Changyong Rhee (the Bank of Korea governor) was less optimistic about blockchain technology’s future, particularly in the monetary sector, in light of recent crypto contagions. He stated that he wasn’t sure if “we are actually seeing the benefits of this technological advancement recently.”
“I was more positive before, but after seeing the Luna, Terra, and now the FTX issues. I don’t know [if] we will see the real benefit of this new technology, at least for monetary policy,” said Rhee.
by Iulia Vasile | Nov 11, 2022 | News
The Bahamas-based company, FTX.com crypto exchange, announced Friday (November 11, 2022) that the crypto exchange had filed for bankruptcy protection in the United States.
Sam Bankman-Fried, the founder and CEO of FTX, has also resigned but said he would assist with an orderly transition. John Ray III will be the new CEO. Ray seems to be the same person who oversaw Enron Corporation’s bankruptcy.
According to Ray, FTX employees will feel the pressure in the near future: “In the short-term, we have some long and hard work ahead.” He also described the bankruptcy filing as “the beginning of a journey forward.”
Respective bankruptcy filings stated that FTX US (and Alameda Research) had between $10 billion to $50 billion in liabilities, as well as a similar range of assets. They also estimated that the funds would be available for distribution to unsecured creditors.
Why did FTX collapse?
This is the context that will help you understand this story. This includes the unexpected crisis of confidence caused by revelations about Sam Bankman Fried’s accounting practices, the shock at Bankman Fried’s reputation as a golden boy, and the complex role played by Binance and Changpeng Zhao, its founder in the crisis.
Let’s start with the background story of Sam Bankman Fried and his other company, Alameda Research, which played a major role in this series of unfortunate events.
At the beginning of November 2022, Alameda was holding around $5.8 billion out of its $14.6 billion assets in FTT, FTX’s exchange token.
Based on leaked documents, this finding was shocking because of the close relationship between Alameda & FTX. Both were established by Bankman-Fried. There has been considerable anxiety about the nature and extent of their fraternal relationships. This raises questions about the open-market, real-world value of FTT tokens that are held in reserve by affiliated entities.
Negative speculation about financial institutions can become a self-fulfilling prophecy. It can trigger withdrawals from a feeling of uncertainty and lead to liquidity problems.
But simple facts can be enough to cause a bank run. FTX token and Alameda have a history of close ties. This led to a mass exodus on November 8th. According to internal messages, Reuters saw $6 Billion in withdrawals on the exchange before things turned sour. What’s more, at the time, FTX exchange has an internal balance of only 1 BTC. Meanwhile, the exchange’s bitcoin balance reached 36 BTC, but this is still minute compared to the half a million BTC held by Binance or Coinbase.
Bankman-Fried’s team began to search for acquisition partners in a rush and approached a range of potential partners just before Binance was involved.
It is still unclear why FTX would want to be rescued even if there was such a rush for exits. Users were promised that the exchange would not speculate on cryptocurrencies in their accounts. If that policy had been followed, then there shouldn’t have been a pause in withdrawals or a balance sheet gap to fill. Coinmetrics analyst Lucas Nuzzi has provided evidence that FTX transferred funds in September to Alameda, possibly as a loan to cover Alameda’s losses.
Alameda’s vast FTT-linked assets seemed to confirm fears about the stability of Bankman-Fried. The token’s market value decreased by 90% between November 7 and November 10.
FTX announced that it had temporarily suspended all crypto withdrawals late in the evening on November 8, following the announcement of a tentative agreement with Binance.
According to a press release, the FTX.com entity, as well as FTX USA, Alameda Research, and “approximately 13 additional affiliated companies,” has filed for Chapter 11 bankruptcy proceedings. Chapter 11 bankruptcy proceedings can be filed by companies that hope or expect to be able to restructure their operations. This is in contrast to Chapter 7 bankruptcy which only liquidates assets.
Companies that file for Chapter 11 bankruptcy can continue to operate their daily operations.
Bankman-Fried posted a tweet after the bankruptcy and apologized. He said, “Hopefully things can find a way to recover. Hopefully this can bring some amount of transparency, trust, and governance to them.”
The release stated that FTX Digital Marketplaces, FTX Australia and FTX Express Payment are not included.
Ray stated that the FTX Group’s valuable assets can only be efficiently managed in an organized, collaborative process. “I want to assure every customer, employee, creditor, contract partner, stockholder, investor and other stakeholder that this effort will be conducted with diligence, thoroughness, and transparency.”
He said that events have been “fast-moving,” and the new team has just begun.
The FTX bankruptcy sent shockwaves on the crypto market
Bitcoin immediately plunged to $1,000 after the bankruptcy news and fell to $16,500 in just minutes.
Bankman-Fried reported FTX’s “liquidity” issues earlier in the week.
Firstly, it was stated Binance had offered to purchase the company. Then, Justin Sun of Tron announced a deal to support TRX-based tokens. FTX halted withdrawals, but FTX US withdrawals remained unchanged. FTX announced that certain jurisdictions had initiated partial withdrawals.
According to a bankruptcy filing, the complete list of companies includes Alameda, various local holdings, and Blockfolio. Quoine and over a dozen FTX entities are also included.
“I was shocked to see that FTX listed BTC Africa S.A. and other AZA Finance entities today,” stated Elizabeth Rossiello in a statement. She is the CEO and founder of BitPesa as well as AZA Finance. To be clear, AZA Finance entities aren’t affected by the FTX bankruptcy. We are taking steps to rectify the erroneous court files,” she said, adding that “in its disorganized haste, FTX erroneously listed their entities in bankruptcy filings.” Here’s the AZA Finance statement regarding the FTX bankruptcy statement.
The crypto market is interconnected
The collapse of the Three Arrows Capital hedge fund has shown that crypto is extremely interconnected. Evidence suggests that Alameda’s financial problems began after it lost half a million dollars to Voyager Digital. Voyager Digital was later purchased by SBF, as it had been insolvent after Terra collapsed.
Unfortunately, as more people are attracted to the crypto and blockchain space, they are drawn by big marketing campaigns to these massive centralized exchanges. the industry has re-created the centralized financial system, including “bank runs” and all. Instead of interfacing directly with peers and blockchains, people now store their money on centralized exchanges. Instead of trusting financial protocols that are not reliable, they place their faith in Wall Street-respected megalomaniacs.
The Securities and Exchange Commission (SEC) also took notice of the FTX and has ongoing investigations. Gary Gensler, Chairman of the SEC, almost gloated about this moment, noting the “toxic mixture” at FTX. He repeated the familiar line that cryptos are securities and should be under his agency’s supervision. Gensler also noted that the industry had been “significantly non-compliant” and that exchanges should “come into and talk to us.”
It is notable that FTX.US, the independent wing of SBF’s trading empire, seems to be solvent. It could all go down tomorrow, but it seems that SBF wouldn’t have done the same shenanigans using FTX.US user funds as he did with the parent company, no matter how tired he was.
Yet, it is important to mention the role that U.S. crypto regulation played in the FTX downfall. Coinbase’s CEO Brian Armstrong argued on Twitter that the stringent-yet-unclear regulatory landscape pushed people like Terra’s Do Kwon and Bankman-Fried overseas, where oversight is lax, and taxes go unpaid. According to Gary Gensler, 95% of crypto trading occurs outside the U.S.
Crypto may fail because it is not regulated
Cryptocurrency was created to allow people to be their own bank by allowing them to be independent and responsible for their finances. Instead, Three U.S. regulators – the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the Department of Justice – have intensified their investigations into FTX. Some of these investigations had been ongoing for months.
In an interview with CNBC, Gensler may be correct in stating that there are rules that could protect crypto investors. Armstrong is protecting his interests here, while Sen. Elizabeth Warren (D.Mass.) and others are calling for tighter regulation. Gensler and Armstrong are calling for tighter regulation on U.S. exchanges. While more explicit regulations are essential, they must be followed. Because crypto is not a country-specific currency, regulators who make it too burdensome will only be able to create the next Terra-based in Singapore or Bahamas-based FTX. Armstrong said that it was absurd to punish U.S. companies like this.
by Iulia Vasile | Sep 21, 2022 | News
Bankers in the Caribbean are facing difficult times. Like many other small economies, these 35 countries face dollarization, dependence on foreign trade, and remittances.
De-risking, a common banking practice, is also causing serious problems. It is no surprise that the region is taking more interest than ever in digital currency adoption.
Carmelle Cadet is the founder and CEO at Emtech. She is a native Haitian and has worked with central banks in Ghana and Haiti. Her company is also part of the Digital Dollar Project Technical Sandbox Program, which is exploring aspects of the United States central bank digital currency (CBDC). She believes that establishing a functioning CBDC in the Caribbean is “a difficult task.”
Banks in the Caribbean: The Risks
The Financial Action Task Force (FATF) lists countries under special surveillance for money laundering and other illegal activities. The so-called grey list was only four, but it seems that the entire region is affected. It is important to do extra research when large international banks offer services like settlement to small local banks in these countries, a process known as correspondent relationships.
International banks are more expensive to do business with if they have done additional due diligence. Banks will often cut ties with banks located in gray-listed countries to avoid paying a higher cost. This is known as de-risking. Many Caribbean countries lost half of their correspondent relationships. This has severe consequences for their economies as well as their societies.
On September 14th, the United States House of Representatives Financial Services Committee held a hearing entitled “When Banks Leave: The Effects of De-Risking in the Caribbean and Strategies for Ensuring Financial Access.” The hearings were attended by Mia Amor Mottley, Prime Minister of Barbados, and Keith Rowley, Prime Minister of Trinidad and Tobago.
According to prime minister Mottley, the regional banking services are accessed with difficulty: “We spend weeks, and businesses that come into our region spend weeks and months, just to open a bank account.”
On Sept. 24, Bahamian Prime Minster Philip Davis raised the topic of de-risking before United Nations General Assembly ten days after the Congressional hearings. He asked, “Why are all the countries being targeted small and vulnerable and former colonies of European states?”
The Bahamas is not currently on the gray list.
Are CBDCs the solution?
The Atlantic Council CBDC tracker shows that three CBDCs were launched within the Caribbean region: Bahamas’ Sand Dollar; Jamaica’s JamDex; and the Eastern Caribbean Central Bank DCash. These CBDCs are located in seven of eight member countries.
The council has listed Haiti’s Digital Gourde under development. Cadet stated that Emtech and HaitiPay presented a proof of concept for a CBDC to the Haitian Embassy in Washington, Washington, on May 5.
Cadet was born in Haiti and immigrated to America in her youth. She was an executive at the IBM Blockchain division when the Bahamas requested proposals for the Sand Dollar. In 2019, as Haiti was going through a roadshow to develop its CBDC, Cadet stated, “If the Bahamas can do that, why not Haiti?” Carmelle Cadet quit IBM to start Emtech.
After the Haiti earthquake, the first financial technology companies were established in Haiti. In 2010, technologies that relied on mobile wallets gained the lead. Jean Baden Dubois, governor of the Haitian Central Bank, stated that mobile phone penetration was 60% in 2008 and is likely to rise in 2021.
Emtech proposed that the CBDC would work online, using mobile phone data. Cadet stated that the rollout of a Haitian CBDC would include device distribution through a partnership with a charity organization. She said that emerging economies are known for using telecommunications to support CBDC functions rather than data networks.
Dubois stated that the Haitian Central Bank saw the CBDC as a way to improve policy efficiency and transparency. This would allow the FATF gray-listed country to meet Anti-Money Laundering/Combating the Financing Of Terrorism standards.
Cadet stated that “dollarization undermines central bank mission of stability.” But by using CBDCs to make cross-border payments, the liquidity and visibility of the reserve would be improved.
But not all CBDC emerging markets are the same
Cadet stated that there are many ways in which CBDC designs are different for emerging markets from those for developed markets. As they strive to settle in real-time, developed markets can afford to slow down, while emerging markets have a greater need for CBDCs.
She said that emerging markets have less baggage, which allows fintech to thrive. While commercial banking is easier in developed markets, the CBDC has more legacy systems that can be integrated.
It is unclear, however, how successful CBDCs are in the Caribbean.
The Sand Dollar, which was widely considered to be the first CBDC, launched in 2020. In July 2022, there were 30,000 digital wallets and about 845 merchants who accepted them. It is promoted by the Bahamian government regularly.
DCash was introduced in April 2021 but crashed in January, and it was down for almost two months. A spokesperson for Grenada-based conglomerate Geo. F. Huggins & Co., the first company to accept a DCash payment, said during the outage that the CBDC represented a “minimal” portion of its sales.
Cadet stated that her company was in talks with the Haitian Central Bank “to understand the licensing risk” about a year prior to the proof-of-concept presentation. She has been in contact with the bank ever since. According to her, the company is currently waiting for the central bank to issue a request for proposals for vendors.
