Global Regulatory Brief: Digital finance, December edition

The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.

Digital finance regulatory developments

With technological innovation becoming increasingly central to the financial services industry, regulators and policy-setters are embarking on a range of initiatives to manage risks and set appropriate standards. From the US to the Global AI Safety Summit, the following developments from the past month in digital finance stand out:

• Global: AI Safety Summit Bletchley Declaration signed by attendees
• US: White House issues executive order on artificial intelligence
• China: National Administration of Data launches 
• EU: Commission consults on criticality designation and oversight fees under DORA
• EU: Commission consults on technical rules to implement the MiCA framework for crypto-assets
• Singapore: Monetary Authority co-creates generative AI risk framework for the financial sector
• Singapore: Monetary Authority expands asset tokenization initiatives 
• UK: Policymakers advance range of initiatives to develop crypto-asset regulatory regime

From digital finance, the green agenda and financial stability, we look at vital regulatory matters for 2023 and beyond.

AI Safety Summit Bletchley Declaration signed by attendees

The countries attending the Artificial Intelligence (AI) Safety Summit in the UK signed the Bletchley Declaration committing to developing a shared understanding of the risks associated with AI. 

In more detail: The declaration welcomes relevant international efforts to examine and address the potential impact of AI systems and to ensure the protection of principles such as transparency, explainability, accountability, bias mitigation, and data protection. 

• The declaration also notes the potential for unforeseen risks stemming from the capability to manipulate or generate deceptive content
• Particular safety risks arise at the ‘frontier’ of AI, understood as being those highly capable general-purpose AI models, including foundation models, that can perform a wide range of tasks
• Concern is particularly pronounced in domains such as cybersecurity and biotechnology, as well as where frontier AI systems may amplify risks such as disinformation

International backdrop: The declaration states that many risks arising from AI are inherently international in nature, and so are best addressed through international cooperation.

• A proportionate approach may mean the creation of classifications and categorisations of risk based on national circumstances and applicable legal frameworks
• Building risk-based policies will increase transparency by private actors developing frontier AI capabilities and the development of appropriate evaluation metrics, tools for safety testing, and developing relevant public sector capability and scientific research

What next: The countries represented at Bletchley Park agreed to support the development of a ‘State of the Science’ Report on the capabilities and risks of frontier AI. The report will be published ahead of the next Safety Summit. 

• The newly launched AI Safety Institute will build public sector capability to conduct safety testing and intends to build its evaluations process in time to assess the next generation of models

White House issues executive order on artificial intelligence

President Biden issued an Executive Order on managing the risks with regard to artificial intelligence (AI) and setting out the direction of travel in terms of the Biden administration’s policy approach to AI. 

In more detail: The Executive Order represents a significant intervention when it comes to determining US policy toward AI, namely:

• Require that developers of the most powerful AI systems share their safety test results and other critical information with the U.S. government 
• Develop standards, tools, and tests to help ensure that AI systems are safe, secure, and trustworthy
• Protect against the risks of using AI to engineer dangerous biological materials by developing strong new standards for biological synthesis screening
• Protect Americans from AI-enabled fraud and deception by establishing standards and best practices for detecting AI-generated content and authenticating official content
• Establish an advanced cybersecurity program to develop AI tools to find and fix vulnerabilities in critical software, building on the Biden-Harris Administration’s ongoing AI Cyber Challenge
• Order the development of a National Security Memorandum that directs further actions on AI and security, to be developed by the National Security Council and White House Chief of Staff

Looking ahead: The Biden Administration will continue to work with Congress to pursue bipartisan legislation to help America lead the way in responsible innovation.

China launches new data agency

China inaugurated the National Administration of Data to advance the ‘Digital China’ agenda and tighten the framework governing the country’s data reserves. 

More details: The new agency will focus on unifying data sharing standards, especially among Government departments, and on driving the digitization of Chinese public services. 

Important context: Currently a variety of government organizations are responsible for data regulation and governance, but the recent focus on Artificial Intelligence (AI) is driving the push for greater consolidation. 

EU consults on draft rules on criticality designation and oversight fees under DORA

The EU Commission published draft rules for consultation on the oversight framework for critical ICT third-party service providers (CTPPs) established under the Digital Operational Resilience Act (DORA), specifically in relation to the definition of the criticality criteria and oversight fees.

The details: The EU Commission specifies how the EU Supervisory Authorities (ESAs) should assess whether an ICT provider is deemed critical under DORA, based on a staged approach building on a set of quantitative and qualitative criteria. 

• In order for the ESAs to carry out their oversight tasks, the EU Commission also sets out how to determine the applicable turnover and the methods to be used for the calculation of the annual fees to be charged to the CTPPs

Further context: The ESAs are also working on the remaining set of detailed implementing measures under DORA. 

• The first batch of draft measures (submitted to stakeholder consultation in the summer) is due to be finalized by the ESAs by 17 January 2024, and the remaining batch is expected to be published in December, and due to be finalized by 17 July 2024

Next steps: Following a stakeholder feedback period (until 14 December), the EU Commission will then finalize the rules and send them to the EU Parliament and Member States for a three month scrutiny period before formal adoption. 

Key date: The DORA Regulation goes live on January 17, 2025.

EU consults on technical rules to implement the MiCA framework for crypto-assets

The European Commission launched a consultation on four draft sets of technical rules setting out additional criteria on the supervision of crypto-assets under the Markets in Crypto-assets Regulation (MiCA). 

What is the Commission doing? The Commission is consulting on: 

1. i) the procedural rules for the EBA to impose fines or periodic penalty payments on issuers of significant asset-referenced tokens (ARTs) and e-money tokens (EMTs)
2. ii) The criteria and factors to be taken into account by the EBA, ESMA and competent authorities 

iii) The criteria for classifying ARTs and EMTs as significant

1. iv) The supervisory fees charged by the EBA to issuers of significant ARTs and EMTs

Comments are due by 6 December 2023. 

Closely related: The European Banking Authority (EBA) is also consulting on further guidance regarding recovery plans for issuers of ARTs and EMTs as well as technical rules on own-funds requirements and the stress-testing of issuers. Following industry feedback, the EBA will then submit the draft rules to the EU Commission.

Looking ahead: Provisions on asset referenced tokens and e-money tokens will be phased in from June 30, 2024, with a majority of provisions under MiCA starting six months after on December 30, 2024.

Singapore co-creates generative AI risk framework for the financial sector

The Monetary Authority of Singapore (MAS) concluded phase one of Project Mindforge, an initiative to identify opportunities for generative AI (genAI) for the financial sector, as well as develop a risk framework for the use of the technology.

More on Project Mindforge: The initiative aims to develop a framework for the responsible use of genAI in the financial sector, and explore opportunities for a genAI-powered industry utility to solve industry-wide common challenges and enhance risk management. The project is supported by a consortium of banks and technology companies. 

First phase in detail: Phase 1 of the project concluded with a comprehensive genAI risk framework and the development of a platform-agnostic genAI reference architecture with a list of building blocks that organizations can use to create genAI capabilities. Seven risk dimensions have been articulated in detail: 

(i) Accountability and governance; 

(ii) Monitoring and stability

(iii) Transparency and explainability

(iv) Fairness and bias

(v) Legal and regulatory

(vi) Ethics and impact

(vii) Cyber and data security

Next steps: In the next phase, the consortium will expand to include insurance and asset management companies. 

Singapore expands asset tokenisation initiatives

The Monetary Authority of Singapore (MAS) has expanded its Project Guardian to catalyze the institutional adoption of digital assets.

Project Guardian: Project Guardian is a collaboration between policymakers and the financial industry to test the feasibility of asset tokenization and DeFi while managing risks to financial stability and integrity. 

• The policymakers include MAS, the UK FCA, Swiss FINMA and Japan FSA 
• Industry participants include banks (e.g. Citi, HSBC, UBS), asset managers (e.g. Schroders, Franklin Templeton) and technology companies (e.g. Ant Group) 
• The objectives of Project Guardian are to understand the opportunities and risk associated with asset tokenization and DeFi, and establish policy guidelines and framework for regulated DeFi

Initial pilots: Some of the pilots under Project Guardian include issuance of variable capital company funds on digital asset networks, pricing and executing of bilateral digital asset trades, and cross-border FX payment solution using smart contracts which create blockchain interoperability. 

Expansion of project: The project has initiated five additional industry pilots to test promising asset tokenisation use cases. 

• MAS is also collaborating with policymakers and banks to explore the design of an open, digital infrastructure that will host tokenized financial assets and applications
• This initiative, Global Layer One, aims to facilitate cross border transactions and enable tokenized assets to be traded across global liquidity pools, while meeting regulatory requirements and guidelines 
• Lastly, the project will develop an interlinked network model to serve as a common framework for exchanging digital assets across independent networks

UK advances range of initiatives to develop crypto-asset regulatory regime

HM Treasury published its response to feedback received on its consultation on the future financial services regulatory framework for crypto-assets.

In summary: On most aspects of the regulatory framework, HMT has not suggested any changes to its proposed approach while modifying certain aspects of the proposals to take onboard feedback. The eventual framework is expected to cover crypto-asset activities such as issuance, disclosure, trading venues, intermediation, custody, market abuse, and lending platforms. 

Stablecoins: The FCA and Bank of England published discussion papers on their proposed approaches to stablecoin regulation. 

• The Bank of England’s discussion paper focuses on a potential regulatory regime for systemic payment systems that use stablecoins and related service providers 
• The FCA’s discussion paper focuses on its regulatory approach to issuers and custodians of fiat-backed stablecoins and their use as a means of payment 
• The papers are open for comment until February 6, 2024 and the regulators have said they will consult on detailed rules in H2 2024 with the new regime set to go live in 2025

Digital Securities Sandbox: The UK Government confirmed its final approach to implementing the Digital Securities Sandbox, which will facilitate the use of digital assets in financial markets.

• HMT summarizes the feedback on the consultation and sets out the government’s response 
• Legislation implementing the DSS will be laid before Parliament in due course

Fund tokenization: The technology working group of the UK Government’s Asset Management Taskforce has published its interim report on UK Fund Tokenisation that focuses on the application of distributed ledger technology (DLT) to investment fund tokenization. 

• The FCA welcomed the report and set out various considerations in a letter to taskforce members

View the additional regulatory briefs from this month:

• Trading and markets
• Risk, capital and financial stability
• Green finance

Sign up to receive these updates in your inbox first.

How we can help

Bloomberg’s Public Policy and Regulatory team brings you insight and analysis on policy developments to help navigate the complex and fast changing global regulatory landscape. To discuss regulatory solutions, please get in touch with our specialists or read more insights from our Regulatory team.

The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.

Digital finance regulatory developments

With technological innovation becoming increasingly central to the financial services industry, regulators and policy-setters are embarking on a range of initiatives to manage risks and set appropriate standards. From the US to the Global AI Safety Summit, the following developments from the past month in digital finance stand out:

• Global: AI Safety Summit Bletchley Declaration signed by attendees
• US: White House issues executive order on artificial intelligence
• China: National Administration of Data launches 
• EU: Commission consults on criticality designation and oversight fees under DORA
• EU: Commission consults on technical rules to implement the MiCA framework for crypto-assets
• Singapore: Monetary Authority co-creates generative AI risk framework for the financial sector
• Singapore: Monetary Authority expands asset tokenization initiatives 
• UK: Policymakers advance range of initiatives to develop crypto-asset regulatory regime

AI Safety Summit Bletchley Declaration signed by attendees

The countries attending the Artificial Intelligence (AI) Safety Summit in the UK signed the Bletchley Declaration committing to developing a shared understanding of the risks associated with AI. 

In more detail: The declaration welcomes relevant international efforts to examine and address the potential impact of AI systems and to ensure the protection of principles such as transparency, explainability, accountability, bias mitigation, and data protection. 

• The declaration also notes the potential for unforeseen risks stemming from the capability to manipulate or generate deceptive content
• Particular safety risks arise at the ‘frontier’ of AI, understood as being those highly capable general-purpose AI models, including foundation models, that can perform a wide range of tasks
• Concern is particularly pronounced in domains such as cybersecurity and biotechnology, as well as where frontier AI systems may amplify risks such as disinformation

International backdrop: The declaration states that many risks arising from AI are inherently international in nature, and so are best addressed through international cooperation.

• A proportionate approach may mean the creation of classifications and categorisations of risk based on national circumstances and applicable legal frameworks
• Building risk-based policies will increase transparency by private actors developing frontier AI capabilities and the development of appropriate evaluation metrics, tools for safety testing, and developing relevant public sector capability and scientific research

What next: The countries represented at Bletchley Park agreed to support the development of a ‘State of the Science’ Report on the capabilities and risks of frontier AI. The report will be published ahead of the next Safety Summit. 

• The newly launched AI Safety Institute will build public sector capability to conduct safety testing and intends to build its evaluations process in time to assess the next generation of models

White House issues executive order on artificial intelligence

President Biden issued an Executive Order on managing the risks with regard to artificial intelligence (AI) and setting out the direction of travel in terms of the Biden administration’s policy approach to AI. 

In more detail: The Executive Order represents a significant intervention when it comes to determining US policy toward AI, namely:

• Require that developers of the most powerful AI systems share their safety test results and other critical information with the U.S. government 
• Develop standards, tools, and tests to help ensure that AI systems are safe, secure, and trustworthy
• Protect against the risks of using AI to engineer dangerous biological materials by developing strong new standards for biological synthesis screening
• Protect Americans from AI-enabled fraud and deception by establishing standards and best practices for detecting AI-generated content and authenticating official content
• Establish an advanced cybersecurity program to develop AI tools to find and fix vulnerabilities in critical software, building on the Biden-Harris Administration’s ongoing AI Cyber Challenge
• Order the development of a National Security Memorandum that directs further actions on AI and security, to be developed by the National Security Council and White House Chief of Staff

Looking ahead: The Biden Administration will continue to work with Congress to pursue bipartisan legislation to help America lead the way in responsible innovation.

China launches new data agency

China inaugurated the National Administration of Data to advance the ‘Digital China’ agenda and tighten the framework governing the country’s data reserves. 

More details: The new agency will focus on unifying data sharing standards, especially among Government departments, and on driving the digitization of Chinese public services. 

Important context: Currently a variety of government organizations are responsible for data regulation and governance, but the recent focus on Artificial Intelligence (AI) is driving the push for greater consolidation. 

EU consults on draft rules on criticality designation and oversight fees under DORA

The EU Commission published draft rules for consultation on the oversight framework for critical ICT third-party service providers (CTPPs) established under the Digital Operational Resilience Act (DORA), specifically in relation to the definition of the criticality criteria and oversight fees.

The details: The EU Commission specifies how the EU Supervisory Authorities (ESAs) should assess whether an ICT provider is deemed critical under DORA, based on a staged approach building on a set of quantitative and qualitative criteria. 

• In order for the ESAs to carry out their oversight tasks, the EU Commission also sets out how to determine the applicable turnover and the methods to be used for the calculation of the annual fees to be charged to the CTPPs

Further context: The ESAs are also working on the remaining set of detailed implementing measures under DORA. 

• The first batch of draft measures (submitted to stakeholder consultation in the summer) is due to be finalized by the ESAs by 17 January 2024, and the remaining batch is expected to be published in December, and due to be finalized by 17 July 2024

Next steps: Following a stakeholder feedback period (until 14 December), the EU Commission will then finalize the rules and send them to the EU Parliament and Member States for a three month scrutiny period before formal adoption. 

Key date: The DORA Regulation goes live on January 17, 2025.

EU consults on technical rules to implement the MiCA framework for crypto-assets

The European Commission launched a consultation on four draft sets of technical rules setting out additional criteria on the supervision of crypto-assets under the Markets in Crypto-assets Regulation (MiCA). 

What is the Commission doing? The Commission is consulting on: 

1. i) the procedural rules for the EBA to impose fines or periodic penalty payments on issuers of significant asset-referenced tokens (ARTs) and e-money tokens (EMTs)
2. ii) The criteria and factors to be taken into account by the EBA, ESMA and competent authorities 

iii) The criteria for classifying ARTs and EMTs as significant

1. iv) The supervisory fees charged by the EBA to issuers of significant ARTs and EMTs

Comments are due by 6 December 2023. 

Closely related: The European Banking Authority (EBA) is also consulting on further guidance regarding recovery plans for issuers of ARTs and EMTs as well as technical rules on own-funds requirements and the stress-testing of issuers. Following industry feedback, the EBA will then submit the draft rules to the EU Commission.

Looking ahead: Provisions on asset referenced tokens and e-money tokens will be phased in from June 30, 2024, with a majority of provisions under MiCA starting six months after on December 30, 2024.

Singapore co-creates generative AI risk framework for the financial sector

The Monetary Authority of Singapore (MAS) concluded phase one of Project Mindforge, an initiative to identify opportunities for generative AI (genAI) for the financial sector, as well as develop a risk framework for the use of the technology.

More on Project Mindforge: The initiative aims to develop a framework for the responsible use of genAI in the financial sector, and explore opportunities for a genAI-powered industry utility to solve industry-wide common challenges and enhance risk management. The project is supported by a consortium of banks and technology companies. 

First phase in detail: Phase 1 of the project concluded with a comprehensive genAI risk framework and the development of a platform-agnostic genAI reference architecture with a list of building blocks that organizations can use to create genAI capabilities. Seven risk dimensions have been articulated in detail: 

(i) Accountability and governance; 

(ii) Monitoring and stability

(iii) Transparency and explainability

(iv) Fairness and bias

(v) Legal and regulatory

(vi) Ethics and impact

(vii) Cyber and data security

Next steps: In the next phase, the consortium will expand to include insurance and asset management companies. 

Singapore expands asset tokenisation initiatives

The Monetary Authority of Singapore (MAS) has expanded its Project Guardian to catalyze the institutional adoption of digital assets.

Project Guardian: Project Guardian is a collaboration between policymakers and the financial industry to test the feasibility of asset tokenization and DeFi while managing risks to financial stability and integrity. 

• The policymakers include MAS, the UK FCA, Swiss FINMA and Japan FSA 
• Industry participants include banks (e.g. Citi, HSBC, UBS), asset managers (e.g. Schroders, Franklin Templeton) and technology companies (e.g. Ant Group) 
• The objectives of Project Guardian are to understand the opportunities and risk associated with asset tokenization and DeFi, and establish policy guidelines and framework for regulated DeFi

Initial pilots: Some of the pilots under Project Guardian include issuance of variable capital company funds on digital asset networks, pricing and executing of bilateral digital asset trades, and cross-border FX payment solution using smart contracts which create blockchain interoperability. 

Expansion of project: The project has initiated five additional industry pilots to test promising asset tokenisation use cases. 

• MAS is also collaborating with policymakers and banks to explore the design of an open, digital infrastructure that will host tokenized financial assets and applications
• This initiative, Global Layer One, aims to facilitate cross border transactions and enable tokenized assets to be traded across global liquidity pools, while meeting regulatory requirements and guidelines 
• Lastly, the project will develop an interlinked network model to serve as a common framework for exchanging digital assets across independent networks

UK advances range of initiatives to develop crypto-asset regulatory regime

HM Treasury published its response to feedback received on its consultation on the future financial services regulatory framework for crypto-assets.

In summary: On most aspects of the regulatory framework, HMT has not suggested any changes to its proposed approach while modifying certain aspects of the proposals to take onboard feedback. The eventual framework is expected to cover crypto-asset activities such as issuance, disclosure, trading venues, intermediation, custody, market abuse, and lending platforms. 

Stablecoins: The FCA and Bank of England published discussion papers on their proposed approaches to stablecoin regulation. 

• The Bank of England’s discussion paper focuses on a potential regulatory regime for systemic payment systems that use stablecoins and related service providers 
• The FCA’s discussion paper focuses on its regulatory approach to issuers and custodians of fiat-backed stablecoins and their use as a means of payment 
• The papers are open for comment until February 6, 2024 and the regulators have said they will consult on detailed rules in H2 2024 with the new regime set to go live in 2025

Digital Securities Sandbox: The UK Government confirmed its final approach to implementing the Digital Securities Sandbox, which will facilitate the use of digital assets in financial markets.

• HMT summarizes the feedback on the consultation and sets out the government’s response 
• Legislation implementing the DSS will be laid before Parliament in due course

Fund tokenization: The technology working group of the UK Government’s Asset Management Taskforce has published its interim report on UK Fund Tokenisation that focuses on the application of distributed ledger technology (DLT) to investment fund tokenization. 

• The FCA welcomed the report and set out various considerations in a letter to taskforce members

View the additional regulatory briefs from this month:

• Trading and markets
• Risk, capital and financial stability
• Green finance

Sign up to receive these updates in your inbox first.

How we can help

Bloomberg’s Public Policy and Regulatory team brings you insight and analysis on policy developments to help navigate the complex and fast changing global regulatory landscape. To discuss regulatory solutions, please get in touch with our specialists or read more insights from our Regulatory team.