BitOoda Regulatory Analysis, 4/13/2020: COVID-19 stimulating the development of CBDCs, while global AML regimes tighten

As governments around the world continue to grapple with the financial impact of the COVID-19 pandemic, we’ve noted an uptick in dialogue and action related to national digital currencies. Following up on our recent piece on the path forward for the Digital Dollar here in the U.S., this week we summarize some of the recent statements and actions related to Central Bank Digital Currencies (CBDCs) while also noting that these developments are moving forward amid a global environment that is increasingly focused on tightening AML rules to meet new standards.

· South Korea’s central bank launched a pilot program for issuing a CBDC. The country has not committed to introducing a national digital currency, but is preparing to do so given changing market conditions. This follows last month’s passage of legislation that recognizes digital assets as part of the country’s financial system.

· France similarly has initiated a program to test the potential integration of a digital Euro in settlement procedures. We find this approach notable, in that France’s approach focuses on a specific use case as a means to assess the pros and cons of CBDCs, even soliciting applications to test the replacement of central-bank-issued money with a token for payments.

· The Bank of International Settlements (BIS), the ‘central bank of central banks,’ issued a report arguing that “developments [related to the pandemic] could speed up the shift toward digital payments.” While the report was focused on the decreasing demand for cash given the perceived potential to spread the coronavirus, we nonetheless note that the BIS report could represent a significant endorsement of CBDCs as a growing number of countries begin exploratory or pilot programs.

Amid these calls and actions toward the pursuit of CBDCs, we also noted several indications that global AML rules are tightening, or at least that regulators want to move toward established standards such as those of the Financial Action Task Force (FATF) or Europe’s new AMLD5.

· The U.K. has now fully implemented its new AML regime, which goes beyond Europe’s 5th AML Directive (AMLD5) and clearly defines the FCA’s jurisdiction over AML for digital assets, as highlighted by a speech last week by an FCA senior leader.

· The European Parliament published a study arguing that EU regulators should expand the definition of cryptocurrency and the scope of digital asset entities subject to EU regulation, including miners and trading platforms.

· The FATF in a report released at the end of March gave the U.S. a rating of “largely compliant” for its adherence to FATF digital asset standards because of “minor deficiencies” in AML/CTF rules. Areas called out include the threshold for MSBs to keep detailed transaction records ($3000 in the U.S. vs. $1000 in FATF guidance), coverage of investment advisors, FinCEN’s ability to designate higher-risk VASPs, and gaps in international legal cooperation.

Are countries and global bodies moving to tighten their AML gaps in preparation for the broader adoption of digital currencies (either CBDCs or private digital assets), or are the macroeconomic policies being considered as part of countries’ pandemic packages separate from the actions of their national regulators? In our view, the latter scenario is more likely, but regardless we encourage our clients to engage with us to ensure they can navigate these global regulations compliantly and with confidence.