The Payments Newsletter including Digital Assets & Blockchain, September 2023

Hogan Lovells Payments Conference 2023: Our Payments Conference, Payments on the Cusp, took place on Wednesday 27 September 2023. It covered a wide range of topics in the payments and financial regulation landscape. For those of you who missed it, or would like a reminder of the topics covered, please click here for the key takeaways from and links to the recordings of each session.

In this Newsletter:

• Regulatory Developments: Payments

• Regulatory Developments: Digital Assets

• Market Developments

• Surveys and Reports

For previous editions of the Payments Newsletters, please visit our Financial Services practice page.

Regulatory Developments: Payments

United Kingdom: PSR consults on specific direction to Faster Payments participants on APP fraud reimbursement requirement​

On 28 September 2023, the Payment Systems Regulator (PSR) published a consultation paper (CP23/10) on a proposed specific direction to payment service providers (PSPs) who participate in Faster Payments, which will underpin the Faster Payments authorised push payment (APP) fraud reimbursement rules.​

This is one of three proposed legal instruments the PSR will use to implement the new reimbursement policy. It consulted (CP23/4) on the other two legal instruments in July 2023 (see this previous Engage article).​

Following industry feedback, the PSR has moved from a draft general direction to a draft specific direction as issuing a specific direction will allow the PSR to provide more clarity on the scope of the PSPs captured by the direction. 

Again following industry feedback, the new proposed implementation (go-live) date for the reimbursement requirement is 7 October 2024.​

The proposed specific direction should be reviewed alongside the draft Pay.UK Faster Payments rules which have also been published but are not final and are not part of the current consultation. A comparison document showing differences between the previous draft general direction and the draft specific direction has also been published.​

The consultation closes at 5pm on 19 October 2023. Subject to consideration of consultation responses, the PSR intends to finalise and publish all three legal instruments in December 2023, which is also when it plans to publish the final consumer standard of caution policy and guidance and the excess and maximum level of reimbursement policy. The implementation (go-live) date will be confirmed at the same time as publication of the final legal instruments and related policy documents. Regarding the planned similar CHAPS reimbursement requirement, the PSR may consult on a direction for direct and indirect CHAPS participants by the end of Q1 2024.​

European Union: EBA publishes technical advice on classification of asset-reference tokens and e-money tokens and related fees under MiCA

On 29 September 2023, the EBA published technical advice for the European Commission relating to delegated acts on certain criteria for the classification of significant asset-referenced tokens (ARTs) and e-money tokens (EMTs) and fees to be charged by the EBA to issuers of significant ARTs and EMTs, to be adopted under the Regulation on markets in cryptoassets ((EU) 2023/1114) (MiCA). The Commission requested the advice in December 2022.

The EBA has also identified gaps in reporting obligations for issuers of ARTs and EMTs under MiCA, and it intends to start work on guidelines in Q1 2024 aimed at securing consistent reporting of data by issuers in accordance with common formats and templates.

The provisions in MiCA relating to issuers of ARTs and EMTs will apply from 30 June 2024.

Global: FSB letters to G20 finance leaders

On 5 September 2023, the Financial Stability Board (FSB) published a letter from Klaas Knot, FSB Chair, to G20 leaders ahead of their summit in New Delhi on 9 and 10 September 2023.

The FSB stressed that the summit was occurring at a "pivotal time for global financial stability" and provided an overview of the FSB's ongoing work and identified a number of key areas of concern. 

The FSB reiterated that they were continuing to address the financial stability implications of cryptoassets, and "stablecoins" particularly.  Following an earlier publication of recommendations for the regulation, supervision, and oversight both of cryptoassets and markets, the FSB, alongside the International Monetary Fund (IMF), are looking to publish a synthesis paper which consolidates the key risks identified by both institutions and provides a roadmap for further action.  This Synthesis Paper has since been published and is considered further under ‘Regulatory Developments: Digital Assets’ below.

In a further letter, the FSB provided an update on its work to implement the G20 Roadmap for enhancing the cross-border payment system.  The FSB have largely completed the first phase of the Roadmap and have progressed on to the second stage which looks to focus efforts on "concrete projects that will make a difference across various parts of the cross-border landscape".  As part of this second phase, the FSB have set a number of targets for 2027 and have identified three priority themes: payment system interoperability and extension; legal, regulatory and supervisory frameworks; and cross-border data exchange and message standards.

Global: FSB reports on data framework challenges relevant to cross-border payments

On 25 September 2023, the Financial Stability Board (FSB) published its Stocktake of International Data Standards Relevant to Cross-Border Payments (Stocktake). 

As part of the Stocktake, the FSB engaged with stakeholders through surveys, soliciting written responses and running workshops.  From this the FSB identified a number of "significant" challenges facing cross-border payments; namely:

1. Fragmentation among data framework requirements and their implementation, most notably across the data needed to accompany a cross-border payment transaction;
2. Uncertainty among payment providers on how to balance the various obligations under different data frameworks;
3. Challenges arising from restrictions on the flow of data across borders; and
4. Frictions may also make innovating in the payment system more challenging.

The FSB acknowledged that some level of friction will always exist in cross-border payments due to different legitimate interests of states (ie AML and data privacy regulations), but they identified five ways in which this friction could be reduced:

1. Aligning AML/CFT related data requirements across jurisdictions, while preserving standards;
2. Promoting greater cooperation among different approaches to data privacy as well as between data privacy and other policy objectives;
3. Promoting alignment and interoperability of technical standards;
4. Exploring how current data frameworks enable, or impede, future developments that may lead to further improvements (e.g. open banking, digital identity, transition to greater real time payments); and
5. Seeking broader interoperability across data frameworks applicable to cross-border payments.

United States: Federal Reserve releases market practices for requests for payment (RFPs)

In conjunction with a press release on 26 September 2023, the Federal Reserve released a paper on voluntary market practices for RFPs which seeks to establish market practices which promote a consistent end-customer experience for both senders and receivers of RFPs.  The paper is specifically targeted at financial institutions and service providers using the Federal Reserve's FedNow Service for instant payments but is still relevant to the wider payments sector.

The market practices were developed in consultation by a 90 organisation strong industry working group convened by the Federal Reserve with "diverse industry representation" which included traditional financial institutions and fintechs.

The paper includes:

• Recommendations on enrolling and enabling billers and customers to send and receive RFPs;
• Specific criteria for populating and presenting clear request for payment messages; and
• Options for useful data passed back to the biller.

United Kingdom: FCA publishes report on payment account access and closures

On 9 August 2023 the FCA sent an information request and accompanying letter on account closures to the largest banks and building societies, with a deadline of 25 August 2023.

The FCA has now analysed the results from the responses of the 34 firms that participated and on 19 September 2023 it published a report setting out what the data has told it so far and what follow-up action it plans to take.

While the data was supplied within a short timescale and there are some limitations (eg some firms were only able to provide data at an account level rather than for individual customers), work undertaken so far has allowed the FCA to come to some initial conclusions which have informed its planned next steps. Those initial conclusions include:

• Political views: Information the FCA has received so far does not suggest that accounts have been closed because of the political beliefs or views lawfully expressed by account holders. However, it will be doing further analysis and supervisory work to be sure of this. It will also look at accounts closed because of reputational risk, where the information provided by firms has so far been inconsistent. The FCA notes that the significant majority of the cases cited with this reason for closure are from payments firms (ie payment or e-money institutions).
• Reasons for declining, suspending or terminating an account: The most common reasons providers gave for declining, suspending or terminating an account were because it was inactive/dormant or because there were financial crime concerns. The FCA has not been able to draw detailed conclusions on the types of customers affected due to the limitations of the data received.
• Approach to de-risking: The FCA recognises that, learning from other jurisdictions, there may be a need for a government-led greater strategic and cross-system response to addressing de-risking in the UK, and potential for legislative change to enhance provisions on rights to access banking services for both individuals and businesses, eg widening access to bank accounts. The FCA concludes that its report shows de-risking requires a ‘system wide’ coherent strategy with clear commitments across both the public and private sector to work to address the different aspects of de-risking.

The FCA expects credit institutions and payments firms to consider the findings in the report and, among other things, consider the management information they collect to monitor the nature, scale and impact of account declines, suspensions and terminations. The FCA also refers firms to its portfolio letters sent earlier in 2023 relating to ensuring good customer outcomes under the Consumer Duty.​

An accompanying letter to HM Treasury sets out areas that the government may wish to consider, including greater checks by Companies House to support the fight against fraud and the development of a strategic approach to digital identity to aid financial inclusion and lessen financial crime risk.​

The FCA has also published a research note, providing an international perspective on account closures (de-risking).​

The FCA plans a number of regulatory actions in response to its report findings. These include additional supervisory work to be sure of firms’ conclusions on accounts closed for political reasons and closer analysis of accounts closed for reasons of reputational risk, and consideration of how to improve data collection to help it monitor firm conduct in relation to account access. The FCA expects to have a better view on any necessary steps in relation to this latter point following the conclusion of the Politically Exposed Persons (PEP) review and it will report on its findings on data more broadly by mid-2024. The FCA also plans to hold a financial inclusion sprint in Q1 2024 focussed on improving consumer access to financial services

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Regulatory Developments: Digital Assets

Global: FSB and IMF synthesis paper on international policies for cryptoassets, including implementation roadmap

On 7 September 2023, the Financial Stability Board (FSB) published a paper it authored in collaboration with the International Monetary Fund (IMF) detailing the joint approach of both institutions to cryptoassets.  The paper does not look to originate fresh policy but instead "synthesises" the existing approach of both institutions, alongside the positions of other international Standard Setting Bodies (SSBs).

The paper was requested by the Indian G20 Presidency, to address the macroeconomic and financial stability risks posed by cryptoasset activities and markets.  This follows a series of high profile market corrections and increased regulatory focus and concern on cryptoasset "stablecoins" in particular.

The paper includes a roadmap and accompanying workplan which provides indicative dates and deadlines for the FSB, other SSBs and national governments to work towards. 

Global: IOSCO consults on policy recommendations for DeFi

On 7 September 2023, the International Organization of Securities Commissions (IOSCO) published a consultation report listing nine policy recommendations concerning decentralised finance (DeFi):

1. Analyse DeFi products, services, arrangements, and activities to assess regulatory responses;
2. Identify responsible persons;
3. Achieve common standards of regulatory outcomes;
4. Require identification and addressing of conflicts of interest;
5. Require identification and addressing of material risks, including operational and technology risks;
6. Require clear, accurate and comprehensive disclosures;
7. Enforce applicable laws;
8. Promote cross-border cooperation and information sharing; and
9. Understand and assess interconnections among the DeFi market, the broader cryptoasset market, and traditional financial markets.

The report is the work of IOSCO's DeFi Working Group and aims to improve transparency, increase investor protection and harmonise DeFi regulation on a global scale.  IOSCO provides guidance behind each of the above recommendations and states that the report should be viewed as complementary to the Policy Recommendations for Crypto and Digital Assets (CDA) Markets consultation they launched in May 2023.

IOSCO welcomes input from all stakeholders and consultation responses should be submitted to [email protected] on or before 19 October 2023. On review of responses, IOSCO plans to finalise the DeFi recommendations and publish a final report around the end of 2023.

United Kingdom: FCA letters outline expectations of and support for firms preparing to comply with cryptoasset financial promotions regime

On 7 September 2023, the FCA published a letter it has sent to firms that intend to communicate or approve cryptoasset financial promotions ahead of the cryptoassets financial promotions regime coming into force on 8 October 2023.  This follows an earlier June 2023 FCA policy statement which set out the final financial promotion rules for cryptoassets.

The letter details the findings of FCA reviews into various cryptoasset firms registered with the FCA and lists both good and poor practice.  The FCA's main findings were:

1. Most firms have faced significant challenges preparing for the financial promotions regime;
2. Firms in global group structures are having to make significant changes to their business models to comply with the regime;
3. Firms have under-appreciated the broad scope and nature of the financial promotion regime; and
4. Firms were not sufficiently considering how certain rules apply to the specifics of the cryptoasset services they provide.

The FCA stated that they expect all firms intending to communicate or approve cryptoasset financial promotions, not just firms already registered with the FCA, to consider the contents of the letter carefully.  The FCA also recommended that firms review previous guidance consultations on cryptoasset financial promotions and financial promotions on social media.

The FCA has also introduced a modification by consent to the financial promotion rules, which will be available to Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR) registered firms intending to communicate cryptoasset financial promotions and authorised firms intending to communicate or approve cryptoasset financial promotions. The effect will be to delay the implementation of the "back end" direct offer financial promotion rules by three months. The modification relates specifically to the rules relating to personalised risk warnings, the 24-hour cooling off period, client categorisation and appropriateness assessments (in COBS 4.10.2AR, COBS 4.12A.15R and COBS 10.1.2R). All other financial promotion rules will still apply from 8 October 2023.

On 21 September 2023, the FCA published a letter it has sent to cryptoasset firms marketing to UK consumers. It sets out a "final warning" to these firms, and those supporting them, to get ready for the cryptoasset financial promotion regime.

For more on the FCA’s June 2023 policy statement on financial promotion rules for cryptoassets, take a look at this Engage article by members of Hogan Lovells’ London office.

Taiwan: Financial Supervisory Commission provides new rules and guidance for cryptoasset firms

On 26 September 2023, Taiwan's Financial Supervisory Commission (FSC), which was confirmed to be the national authority tasked with regulating cyrptoassets in Taiwan earlier this year, unveiled a series of guiding principles (only available in Mandarin) for virtual asset service providers (VASPs).

According to a related FSC press release, the guiding principles strengthen the protection of customers including in terms of transaction information transparency, customer asset custody methods, and platform operators' internal control management.

Global: BIS urges development of rules regarding central bank digital currencies (CBDCs)

In a speech on 27 September 2023, Agustin Carstens, the General Manager of the Bank for International Settlements (BIS), urged central banks to ensure that any work to produce  Central Bank Digital Currencies (CBDCs) is done legitimately and in line with the powers allocated to central banks.

Carstens referenced an IMF paper, published in 2020, which found that nearly 80% of central banks were either not allowed to issue a digital currency under their existing laws, or the legal framework was unclear.  Carstens considered this to be "unacceptable" as the current monetary system "needs to evolve".

Carstens concluded that any CBDC framework must include three "core" elements:

1. The privacy of CBDC users and the protection of their data;
2. The integrity of the financial system; and
3. The ability of users to choose between CBDC and other forms of money.

United Kingdom: JMLSG finalises cryptoasset transfer guidance

Following an earlier consultation (see the August 2023 Newsletter), on 31 August 2023 the Joint Money Laundering Steering Group (JMLSG) published a revised version of chapter 22 of Part II of its AML and CTF guidance for the financial services sector and a new Annex 22-I on cryptoasset transfers.

Annex 22-I is designed to complement the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), which implemented the FATF "travel rule" for UK cryptoasset transfers, and the JMLSG has stressed that cryptoasset businesses must take all reasonable steps to ensure that they comply with the travel rule requirements.  The Annex seeks to provide guidance to firms so that they can create and develop their own systems and controls to prevent cryptoassets being used in transactions contrary to AML and CTF regulations.

On 20 September 2023, the JMLSG published a press release announcing it has received HM Treasury ministerial approval for the above changes.

Australia: Senate Economics Legislation Committee rejects private member's bill on digital asset regulation

In September 2023, the Australian Senate Economics Legislation Committee issued a report rejecting the Digital Assets (Market Regulation) Bill 2023 proposed by its deputy chair.  The Committee welcomed the opportunity to "consider stakeholders’ views on the regulation of digital assets in Australia" but found that the Bill was "at odds with the measured and industry accepted approach" that the Australian Government was currently pursuing.

The Committee's report gives an indication of what form digital asset regulation may take in the near future.  The Committee considered that:

• Digital asset regulation should strike the right balance between improved consumer protections and support for industry development; and
• It was important to ensure that digital asset regulation was congruent with international regimes.

Additionally, the Committee stated that they were anticipating a further Australian Government consultation on digital assets licensing and custody requirements "in the coming weeks."

Kenya: Ad Hoc Parliamentary Committee recommends new oversight, regulations and enforcement framework for virtual assets and virtual asset service providers

In September 2023, an Ad Hoc Committee of the Kenyan Parliament issued a wide-ranging report on digital assets in Kenya.

The Committee considered that Kenya requires a "more progressive and responsive regulatory framework" on digital assets.  Specifically, the Committee has recommended that:

• The Kenyan Government consult with stakeholders to develop a "comprehensive oversight framework and polices" and "regulations and enforcement infrastructure" on virtual assets and virtual asset service providers and submit the consultation to the Kenyan Parliament within six months; and

The Kenyan Parliament conduct several reviews of the current legal framework to ensure harmonisation and legibility across the various Acts of Parliament in force

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Market Developments

Global: BIS and central banks successfully test cross-border wholesale CBDCs

On 28 September 2023, the Bank for International Settlements (BIS) reported that its "Project Mariana", run in conjunction with the central banks of France, Singapore, and Switzerland, has resulted in the  successful testing of the cross-border trading and settlement of wholesale central bank digital currencies (wCBDCs).

The experimental project used a variety of decentralised finance tools – such as an Automated Market Maker which is used to automatically trade and settle spot FX transactions – to trade and settle hypothetical Euro, Singaporean Dollar and Swiss Franc wCBDCs.

United Kingdom: Chase UK to prevent customers from purchasing cryptoassets citing fraud concerns

On 27 September 2023, it was reported that Chase UK has informed customers that from 16 October 2023, they will no longer be able to purchase cryptoassets.  Chase UK attributed their actions to part of a wider move to safeguard customers from scams and tackle fraudulent transactions.

Netherlands: Gemini to end operations in the Netherlands by mid-November 2023

It has been reported that in a letter to customers on 26 September 2023 the cryptocurrency exchange Gemini announced they will cease all operations in the Netherlands by 17 November 2023.  Gemini stated that the exit follows increased scrutiny on cryptoasset firms by the Dutch central bank, De Nederlandsche Bank (DNB), and a similar exit by another cryptocurrency exchange, Binance, earlier in 2023.

In their letter to customers, Gemini said that they intended to continue to work towards full compliance with the EU Markets in Crypto-Assets (MiCA) Regulation and re-enter the Dutch market at a later date.

United States: J.P. Morgan authorised by U.S. Treasury to offer account validation services to U.S. Government

J.P. Morgan announced on 27 September 2023 that it had been designated by the United States Treasury Department under a financial agency agreement to provide account validation services for federal government agencies. 

The agreement follows an estimation from the U.S. Government Accountability Office that the federal government made $247 billion in improper payments during the 2022 fiscal year.  Through verifying critical payment information it is hoped that J.P. Morgan will assist the federal government in blocking erroneous payments before they are issued.

Germany: Mercedes-Benz partners with Mastercard to allow in-car payments

On 25 September 2023, Mastercard announced that they have partnered with Mercedes-Benz to incorporate their Secure Card on File for Commerce platform in Mercedes-Benz vehicles at the point of sale.  The platform will allow customers in Germany to initiate refuelling directly from the control panel in their vehicle and pay digitally with their fingerprint.

Mastercard hopes to extend this offering to  vehicle-related services and to other European markets.

Spain: Coinbase to increase offering following registration with Bank of Spain

The cryptocurrency exchange Coinbase announced on 22 September 2023 that they have registered as a cryptocurrency exchange and custodian wallet provider with the Bank of Spain.

Coinbase has said that, following the registration, they are looking to expand both their retail and institutional offering in the country with users now able to:

• Hold custody of cryptoassets;
• Buy or sell cryptoassets; and
• Trade cryptoassets against other cryptoassets.

United States: J.P. Morgan reportedly working to launch a Blockchain-based deposit token for payments

On 7 September 2023 it was reported that J.P. Morgan is working towards producing a blockchain-based digital deposit token.  The project would go beyond the capabilities of the existing "JPM Coin", a blockchain-based digital deposit token announced in 2019, as it would be capable of facilitating payments to other banks.

While J.P. Morgan are said to have developed "most of the underlying infrastructure" needed, the project is still in its early stages and J.P. Morgan would not launch the product until it has been approved by U.S. regulators.

United States: Shift4 and Amazon partner to expand checkout-free shopping at stadiums and arenas

On 28 September 2023, Shift4 announced that, in partnership with Amazon, customers will be able to shop checkout-free at the United Centre stadium in Chicago.  The system operates by customers scanning the venue’s mobile wallet, which is powered by Shift4, and then picking up what items they would like to purchase, which is monitored with Amazon's  Just Walk Out technology, to create a virtual shopping session.  Once customers have their goods, they can immediately leave the store, and their Shift4-powered wallet is charged for items they take.

United Kingdom: Visa and Lloyds Bank launch virtual card solution for businesses

Visa announced on 27 September 2023 that they have partnered with Lloyds Bank to offer virtual card solutions to Lloyds Bank business clients of any size.  The new offering allows for business account holders to instantly issue virtual cards – which can be single or multi-use.  Visa suggests that the virtual cards could be used by employees for their business-related purchases (such as contracted or ad-hoc spend purchases, subscription payments or business travel).

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Surveys and Reports

United Kingdom: UK Finance has published its UK Payment Markets Report 2023

In a press release on 14 September 2023, UK Finance announced that it has published its 2023 Payment Markets Report which analyses data for 2022 and forecasts trends in payments up to 2032.

UK Finance's analysis of 2022 data showed:

• That the total number of payments increased to 45.7 billion, up from 40.4 billion in 2021;
• For the first time, half of all payments (50 per cent) in the UK were made using debit cards;
• The number of cash payments increased to 6.4 billion payments (6 billion in 2021) although the proportion of payments made using cash fell slightly from 15 per cent to 14 per cent;
• The number of contactless payments increased by 30 per cent to 17 billion; and
• Nearly a third of adults are registered for at least one mobile payment service, while 86 per cent of adults used a form of remote banking.

Looking forward, UK Finance expects current trends to continue with "debit cards becoming ever more popular and cash usage falling".

Global: The Paypers release their Payment Methods Report 2023

Following a press release on 25 September 2023, the Paypers published their Payment Methods Report 2023 which offers insights into a number of topics, including:

• The latest trends in global payments (including: cross-border payments; complexity of payment methods; and acceleration of instant payments); and
• Globally trending payment methods (including: buy now, pay later products; open banking; and biometric payments).

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Authored by Virginia Montgomery and Grace Wyatt.

Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.