Global Regulatory Brief: Digital finance, March edition | Insights | Bloomberg Professional Services (2024)

Digital finance regulatory developments

As technology continues to reshape financial services, regulators and policy setters are embarking on a range of digital-finance initiatives to manage risks and set appropriate standards. From Hong Kong to the EU, the following developments from the past month in digital finance stand out:

• UK: Government publishes response to AI regulation white paper
• Quebec: AMF publishes discussion paper on AI in financial services
• EU: AI Office officially launches
• Hong Kong: Government issues world’s first multi-currency digital bond
• ASEAN: South-East Asian nations release Guide on AI Governance and Ethics
• EU: ESAs report mapping financial services activities provided by BigTechs
• EU: ESMA consults on guidelines under EU Markets in Crypto Assets Regulation
• US: House of Representatives launches bipartisan AI task force
• US: Treasury Sec. Yellen calls for Congressional Action on stablecoins

UK publishes response to AI regulation white paper

The UK Government department for Science, Innovation, and Technology published its response to its AI Regulation white paper first released in March 2023.

In summary: The response confirms the direction of travel so far, namely that the UK is taking a more ‘agile’ approach to AI regulation by giving regulators the tools they need to address the application of AI in their own sectors.

• The response also confirms that the UK government will not rush to legislate or implement ‘quick-fix’ rules on the grounds that they may soon become outdated or ineffective
• The Government has announced £10 million in funding to prepare and upskill regulators as they seek to develop the necessary tools to engage in this area
• The Government notes recent examples of regulators already taking action, such as updated guidance from the Information Commissioner’s Office on how data protection laws apply to AI systems
• The government’s response lays out a case for further targeted binding requirements on the small number of organizations that are currently developing highly capable general-purpose AI systems, to ensure that they are accountable for making these technologies sufficiently safe

Looking ahead: Key regulators, including Ofcom and the Competition and Markets Authority (CMA), have been asked to publish their approach to managing the technology by April 30, 2024.

• The Government will formally establish activities to support regulator capabilities and coordination, including a new steering committee
• They will issue targeted consultations on the cross-economy AI risk register as authorities assess the regulatory framework
• The Government will also continue to lead international conversations on AI governance across a range of fora and initiatives in the lead up to the next AI Safety Summits in the Republic of Korea and France.

AMF publishes discussion paper on AI in financial services

Québec’s financial regulator — the Autorité des marchés financiers (AMF) — has published a discussion paper regarding best practices for the responsible use of AI in financial services to open up a dialogue with industry.

Important context: This document is not intended to implement a new framework or modify an existing one as no new obligations on financial institutions are being introduced.

• Rather, the AMF is seeking input from industry players on the opportunities and challenges involved in deploying AI in the financial sector
• The results of this initiative will inform future work by the AMF to enhance existing or develop new frameworks, as needed, so that the risks involved are clearly understood and properly managed

In more detail: The AMF outlines 30 best practices for the responsible use of artificial intelligence systems (AISs) that draw upon a number of regulatory initiatives in other jurisdictions.

• These practices are organized under consumer protection, transparency, appropriateness, responsibility, AI design and use, and managing AI-associated risks
• The AMF is also looking for feedback on the cases of AI in finance that present the most risk and whether or not financial players have the resources to implement the proposed practices

Looking ahead: Comments and answers can be submitted before June 14, 2024 and the AMF will also be organizing round tables and discussion forums in the coming months in order to obtain additional feedback and deepen understanding and reflection on the use of AI in the financial sector.

EU AI Office officially launches

The European Union’s AI Office officially launched as a new established entity within the European Commission.

In summary: This will play an important role in the implementation of the EU’s AI Act, the first-ever comprehensive legal framework governing AI, by supporting governance bodies in the 27 Member States and enforcing the rules for general-purpose AI models.

• It will have the power to conduct evaluations of general-purpose AI models, request information and measures from model providers, and apply sanctions
• To support the AI Office’s work, there will be an advisory forum and a scientific panel
• It will also create fora for cooperation of providers of AI models and systems to share best practices, and contribute to the development of codes of conduct and codes of practice

Looking ahead: The AI Office will soon open up applications from external experts and stakeholders through a dedicated call for expression of interest.

Hong Kong issues world’s first multi-currency digital bond

Hong Kong announced the successful offering of around HK$6 billion worth of digital green bonds denominated in HKD, RMB, USD and EUR under the Government Green Bond Programme. The HKD tranche were priced at 3.8%, RMB at 2.9%, USD at 4.749% and EUR at 3.647%.

Wide-ranging interest from various sectors: The digital green bonds attracted subscription from institutional investors globally, financial institutions across buy side and sell side, as well as non-financial corporates.

Breaking new grounds: This is the second issuance following Hong Kong’s inaugural issuance of digital green bonds in February 2023. This issuance achieved several breakthroughs in terms of broadening investor participation via existing market infrastructure, streamlining issuance process by issuing in a digitally-native format, building in standardization elements, and integrating green bond disclosures with the digital assets platform.

Green and digital transformation agenda: The issuance of these digital green bonds comes as Hong Kong seeks to demonstrate its commitment to be a leading green and sustainable finance hub, as well as their sophisticated adoption of digitalization technology.

ASEAN releases Guide on AI Governance and Ethics

The Association of South East Asian Nations (ASEAN) released their Guide on AI Governance and Ethics, which serves as a practical guide for organizations in the region that wish to design, develop, and deploy traditional AI technologies in commercial and non-military or dual-use applications. It also includes recommendations on national-level and regional-level initiatives that governments in the region can consider implementing to design, develop, and deploy AI systems responsibly.

The purpose: Local government authorities are encouraged to refer to this guide when formulating their policies and approaches; organizations are encouraged to refer to the guidelines in this document to understand how to assess the risks associated with AI and take measures to design, develop, and deploy AI responsibly in the context of their organizations.

Guiding principles: The five guiding principles of the framework are (i) transparency and explainability; (ii) fairness and equity; (iii) security and safety; (iv) robustness and reliability; (v) human-centricity; (vi) privacy and data governance; and (vii) accountability and integrity.

Key components: The four key components that make up the guide are:

• Internal governance structures and measures: A multi-disciplinary, central governing body, such as an AI Ethics Advisory Board, should be set up to oversee AI governance efforts. There should be internal standards, guidelines to help the organization design, develop and deploy AI responsibly and clearly lay out roles and responsibilities of personnel involved
• Determining level of human involvement in AI-augmented decision-making – There are three broad categories of human involvement based on level of risk- human-in-the-loop, human-over-the loop, and human-out-of-the-loop. There should be relevant risk impact assessments to determine level of risk
• Operations management – The AI System Lifecycle consists of various stages and is often an iterative process. Risk-based assessments should be conducted before starting any data collection and processing or modeling to mitigate risks of unjust bias due to insufficiently representative training, testing and validation datasets
• Stakeholder interaction and communication – Develop trust with stakeholders throughout the design, development and deployment of AI. For example, by providing general disclosure of when AI is used in products and/or services offerings, and put in place measures to help employees adapt to an AI-augmented work environment

National-level and regional-level recommendations: The guide differentiates between national-level and regional level recommendations. National-level recommendations include nurturing AI talent and upskilling the workforce, supporting AI innovation ecosystem, and raising awareness among citizens on the effects of AI in society.

Regional-level recommendations include setting up an ASEAN Working Group on AI Governance to drive and oversee AI governance initiatives in the region, and compiling a compendium of use cases demonstrating practical implementation of the guide by organizations operating in ASEAN.

Going forward: This guide is meant to be a living document that should be periodically reviewed and assessed by relevant ASEAN sectoral bodies, in consultation with industry partners, to ensure that it is up to date with the latest regulations and advancements in the AI space. Updates to this guide may be published subsequently to keep up with evolutions and growth in governance and standards.

ESAs report mapping financial services activities provided by BigTechs in the EU

The European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published a Report taking stock of BigTech direct financial services provision in the EU.

Objective: The Report identifies the types of financial services currently carried out by BigTechs in the EU pursuant to EU licenses, and highlights inherent opportunities, risks, regulatory, and supervisory challenges therein.

Context: This comes as a result of a 2023 cross-sectoral assessment of BigTech subsidiaries providing financial services in the EU, originating in the EU Digital Finance Strategy.

Findings: BigTech subsidiary companies currently licensed to provide financial services pursuant in the EU mainly focus on the payments, e-money and insurance sectors and, in limited cases, the banking sector.

• The ESAs did not identify a presence of any BigTech subsidiaries with authorization to carry out financial services in the securities and markets’ sector
• At this stage, EU supervisors do not observe financial stability risks flowing from these activities

Recommendations: To further strengthen the mapping of their activities in the EU’s financial sector, the ESAs propose to set-up a data mapping tool within the European Forum for Innovation Facilitators (EFIF), a platform for supervisors to regularly share experiences from their engagement with firms. The matrix should provide a dynamic and more granular framework to improve the visibility over BigTech activities in the financial sector, combining their role as direct financial service providers with that as technology providers and gatekeeper platform providers.

ESMA consults on guidelines under EU Markets in Crypto Assets Regulation

The European Securities and Markets Authority (ESMA) published two consultations on guidelines under Markets in Crypto Assets Regulation (MiCA): i) one on reverse solicitation and ii) one on the classification of crypto-assets as financial instruments.

Consultation paper on guidelines on reverse solicitation – in more detail: ESMA is seeking feedback on proposed draft guidance relating to the conditions of application of the reverse solicitation exemption and the supervision practices that National Competent Authorities (NCAs) may take to prevent its circumvention.

• The proposed guidance confirms ESMA’s previous messages that the provision of crypto-asset services by a third-country firm is limited under MiCA to cases where the client is the exclusive initiator of the service.
• This exemption should be understood as very narrowly framed and must be regarded as the exception.

Consultation paper on guidelines on conditions and criteria for the classification of crypto-assets as financial instruments – in more detail: Building on previous work by ESMA, this consultation seeks views on the perimeter gap between MiCA and the Markets in Financial Instruments Directive II (MiFID II) across the EU.

Looking ahead: Comments are due by April 29, 2024 and a final report should come by end 2024.

U.S. Treasury Sec. Yellen calls for Congressional Action on stablecoins

Treasury Secretary Janet Yellen called on Congress to pass legislation to establish a regulatory framework for stablecoins during testimony before the U.S. House of Representatives’ Committee on Financial Services.

In more detail: Yellen stated that the Financial Stability Oversight Council (FSOC) is focused on digital assets and related risks such as from runs on crypto-asset platforms and stablecoins, potential vulnerabilities from crypto-asset price volatility, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.

• Yellen stressed that applicable rules and regulations should be enforced, and Congress should pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities
• We look forward to continuing to engage with Congress on this

Wider context: Yellen’s intervention comes as multiple senior regulators are pushing Congress to act on stablecoins.

U.S. House of Representatives launches bipartisan AI task force

House Speaker Mike Johnson and Democratic Leader Hakeem Jeffries announced the creation of a bipartisan Task Force on Artificial Intelligence.

Goal: Lawmakers have explained that the task force will aim to look at how America can continue to innovate in the AI space, while developing appropriate guardrails to protect against “current and emerging threats”.

Why it matters: AI is a major topic in Washington and will continue to be throughout 2024. It is not clear if the task force will produce any legislation, although they will seek to produce a report which could serve to provide additional insight into future legislative action.

View the additional regulatory briefs from this month:

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

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