HomeServicesCompanyInsightsCareersContactE-Banking
Sign up for our newsletter
Receive insights on the current developments at SEBA and stay ahead of the curve with our well-founded in house research papers.
First name
Last name
Email address
Continue
IntroductionRegulatory certainty, a prerequisite for digital payment solutionsOther noteworthy developmentsConclusion
Thursday, 14 May, 2020
The Digital Regulator

COVID-19 pandemic places digital payment regulation at centre stage

During the coronavirus (COVID-19) pandemic, the literature on digital regulations has focused on digital payment solutions, particularly, Global Stablecoins (GSCs) and Central Bank Digital Currencies (CBDCs). It is reasonable to expect that the pandemic will lead to improved regulatory certainty, which would enable the speedy market entry of digital payment solutions.

Introduction

The advantages of contactless payments and digital banking solutions (web- or mobile phone-based) have emerged quite prominently in the current lockdown (characterised by limited mobility, social distancing, and contactless relationships). Yet, the fundamental opportunities for the development of GSC (i.e. inefficient cross-border payments and inclusion) and CBDC (i.e. de-materialisation of cash) have been recognised long before the pandemic. The renewed regulatory focus on digital payment solutions, due to the current pandemic, reminds us that such solutions depend on regulatory (or legal) certainty to see the light of day.

Reviewing the past 4-5 weeks, we also highlight the development of industry standards by trade associations, for security token offerings (STOs) as well as for digital assets custody; recent initiatives by the Chinese authorities to develop blockchain standards and solutions; the creation of a digital sandbox zone in Portugal; and the pivotal role of the implementation of legal frameworks in influencing success in the blockchain industry (as seen in Switzerland and Malta).

Regulatory certainty, a prerequisite for digital payment solutions

The pandemic and the subsequent lockdown has highlighted the advantages of contactless payments and digital banking solutions.

In the wake of the COVID-19 epidemic, international regulators, such as the Financial Stability Board (FSBFSBlink1), the Basel Committee on Banking Supervision (BCBSBCBSlink1), and the European Central Bank (ECBECBlink1), have focused on discussing private sector’s GSC and (retail) CBDC. A few central banks have followed suit1. Amid these developments, the Swiss FINMAFINMAlink1 announced that the Libra association filed an application for a payment system licence.

The correlation between these discussions and COVID-19 is however a weak one. CBDC and GSC cannot stop a pandemic just like paper money did not cause it. The efforts towards regulation of digital payment solutions had begun well before the pandemic was declared, based on secular trends like de-materialisation of money and the realisation of inefficient cross-border payments. The regulatory focus brought on by the pandemic reminds us that digital payment solutions, fundamentally ready and waiting from a technological perspective, depend on regulatory certainty to see the light of day.

  • The pandemic has highlighted the case for digital payment solutions – Measures to contain COVID-19 have required people to avoid contact with paper money and coins, to maintain social distance and to limit movements. Reportedly, cash and ATM usage in the UKUKlink1 dropped by 50% in a few days, and GermanyGermanylink1 witnessed a surge in contactless payments. Other countriescountrieslink1 such as Indonesia, India and Russia urged their citizens to steer away from cash. These incidents can be safely generalised to the entire world. The pandemic has thus vividly shown the value of technologies in allowing the society to bank at arm's length by means of contactless payments and digital banking solutions. The fundamental opportunities for developing these solutions have however been highlighted well before the pandemic – as CBDC was introduced as a result of the secular trend of de-materialisation of money, while GSC was developed due to inefficient cross-border payments and insufficient inclusion. GSC and CBDC are poised to provide financial services in a more efficient way, promote financial inclusion, diversify the payments market, and enhance cooperation amongst regulators.
  • Regulatory certainty is necessary to enable digital payment solutions – GSC systems will see the light of day when regulators provide solutions for the challenges such systems raise.GSC systems heighten the regulatory challenge to mitigate the risk of financial instability that the malfunctioning of such a system would cause. The hurdles are pre-eminently with regard to governance Stabilisation mechanisms, redemption arrangements and reserve management raise market, liquidity, and credit risks. The infrastructure supporting GSC systems also involves operational and privacy risks. The functioning of a GSC system presents legal issues on the rights of redemption and the related processes. Finally, the supervision of a GSC system raises the challenge of effective cross-border regulatory cooperation and dialogue. The providers of GSC systems need regulatory certainty to bring the products to the market. The Swiss regulator FINMA is once again paving the way in creating such certainty by engaging with the Libra association in a license application process. The challenges around the introduction of CBDC are with regard to economic policy. CBDCs may affect the execution of monetary policy and exacerbate the risk of a bank run (e.g. in a crisis, economic agents can easily convert the balances they hold with commercial banks into CBDCs). The Swiss National Bank participates in a BISBISlink1-led group created to assess the case for and address the challenges put forth by CBDC.

In conclusion, the economic situation that brought about the GSC and CBDC systems was noted long before the COVID-19 pandemic. It, however, amplified the advantages and use cases of digital payment solutions, and reminded policy makers to address the regulatory hurdles that hinder such solutions from entering the market. It is reasonable to expect that the renewed focus of regulators on digital payment solutions triggered by this pandemic will enable such products to reach the market faster.

Other noteworthy developments

The FSBFSBlink1 issued ten consultative recommendations to advance GSC regulation.

  • The recommendations, addressed to national authorities, call upon them to embrace functional and risk-based regulations; ensure effective cooperation, comprehensive risk management, and governance frameworks; and grant legal clarity and transparent disclosure. The FSB declared that the implementation of these recommendations would be a pre-condition for authorising any GSC system to operate.

Trade associations provide industry standards for STOs and Digital Assets Custody.

  • The Japan Security Token Offering Association (JSTOAJSTOAlink1) published self-regulatory guidelines covering the digitisation of transfer rights and the management of client assets. This self- regulation enhances regulatory clarity and favours STOs.
  • The Capital Markets and Technology Association (CMTACMTAlink1) released Digital Assets Custody Standard with the aim to bridge the gap between traditional asset custody (which is well standardised) and digital asset custody.

China takes steps to develop blockchain standards and solutions.

  • The ChineseChineselink1 government put together a technical committee devoted to the development of standards for blockchain and distributed ledger technology, and also launchedlaunchedlink1 its national blockchain platform to encourage enterprises and individuals to innovate and accelerate the development and use of blockchain technology.

Portugal creates a digital sandbox zone.

  • The creation of the “Technological Free Zone” in PortugalPortugallink1 is part of the country’s digital transition action plan. It stands out from the existing sandboxes in that it goes beyond existing approaches in terms of scope and depth.

FINMA reported investigation into 60 ICOs during 2019, opening enforcement proceedings against three companies.

  • In 2019, FINMAFINMAlink1 carried out investigations into approximately 60 Initial Coin Offerings (ICOs), identifying a breach of the Anti-Money Laundering Act (AMLA) in more than ten ICOs and opening enforcement proceedings against three companies. Switzerland thus demonstrates that its success as a ‘cryptonation’ is owed to an efficient implementation of the legal framework.

Delays in implementing the legal framework led to departure of several blockchain firms from Malta.

  • MaltaMaltalink1 has failed to license any business even after more than 15 months since the passing of the blockchain legal framework.As a consequence, this led to the departure of a number of companies from the ‘blockchain island’. Thus, Malta has set an example that delayed implementation of the legal framework can complicate the development of a ‘blockchain island’.

Conclusion

The review of the digital regulation literature during the pandemic has revealed a clear focus on digital payment solutions such as GSC and CBDC. While the focus is understandable, given the circumstances of lock-down and social distancing, the opportunity for digital payment solutions pre-dates the COVID-19 pandemic. Yet, the renewed attention to these topics may bring forward the legal (regulatory) certainty required for the practical solutions to see light.

We have highlighted initiatives by trade associations to standardise STO processes and Digital Assets Custody. We also looked at the different fates witnessed in ‘cryptonation’ Switzerland and ‘blockchain island’ Malta, attributable to the attitudes of commercial banks towards cryptofinance legal frameworks.


1These include the Dutch (DNB) and Chinese central banks as well as regulatory authorities in the Unites States.
Download pdf
Share:
Subscribe to the research newsletter and get weekly updates about the latest articles of SEBAresearch
Subscribe to newsletter

Authors


Mattia Rattaggi
External Regulatory Analyst
METI Advisory AG
in
Yves Longchamp
Head of Research
SEBA Bank AG
in
research@seba.swiss | Disclaimer

Disclaimer

This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial investment or to participate in any particular investment strategy. This document is for distribution only under such circumstances as may be permitted by applicable law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction.

No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this document, except with respect to information concerning SEBA. The information is not intended to be a complete statement or summary of the financial investments, markets or developments referred to in the document. SEBA does not undertake to update or keep current the information. Any statements contained in this document attributed to a third party represent SEBA's interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party.

Any prices stated in this document are for information purposes only and do not represent valuations for individual investments. There is no representation that any transaction can or could have been effected at those prices, and any prices do not necessarily reflect SEBA’s internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by SEBA or any other source may yield substantially different results.

Nothing in this document constitutes a representation that any investment strategy or investment is suitable or appropriate to an investor’s individual circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own judgment in making their investment decisions. Financial investments described in the document may not be eligible for sale in all jurisdictions or to certain categories of investors. Certain services and products are subject to legal restrictions and cannot be offered on an unrestricted basis to certain investors. Recipients are therefore asked to consult the restrictions relating to investments, products or services for further information. Furthermore, recipients may consult their legal/tax advisors should they require any clarifications. SEBA and any of its directors or employees may be entitled at any time to hold long or short positions in investments, carry out transactions involving relevant investments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment itself or to/for any company commercially or financially affiliated to such investment.

At any time, investment decisions (including whether to buy, sell or hold investments) made by SEBA and its employees may differ from or be contrary to the opinions expressed in SEBA research publications.

Some investments may not be readily realizable since the market is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Investing in digital assets including cryptocurrencies as well as in futures and options is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may under certain circumstances occur. The value of any investment or income may go down as well as up, and investors may not get back the full amount invested. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. Tax treatment depends on the individual circumstances and may be subject to change in the future.

SEBA does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific investor’s circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of individual investors and we would recommend that you take financial and/or tax advice as to the implications (including tax) prior to investing. Neither SEBA nor any of its directors, employees or agents accepts any liability for any loss (including investment loss) or damage arising out of the use of all or any of the Information provided in the document.

This document may not be reproduced or copies circulated without prior authority of SEBA. Unless otherwise agreed in writing SEBA expressly prohibits the distribution and transfer of this document to third parties for any reason. SEBA accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this document.

Research will initiate, update and cease coverage solely at the discretion of SEBA. The information contained in this document is based on numerous assumptions. Different assumptions could result in materially different results. SEBA may use research input provided by analysts employed by its affiliate B&B Analytics Private Limited, Mumbai. The analyst(s) responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting market information The compensation of the analyst who prepared this document is determined exclusively by SEBA.

Austria: SEBA is not licensed to conduct banking and financial activities in Austria nor is SEBA supervised by the Austrian Financial Market Authority (Finanzmarktaufsicht), to which this document has not been submitted for approval. France: SEBA is not licensed to conduct banking and financial activities in France nor is SEBA supervised by French banking and financial authorities. Italy: SEBA is not licensed to conduct banking and financial activities in Italy nor is SEBA supervised by the Bank of Italy (Banca d’Italia) and the Italian Financial Markets Supervisory Authority (CONSOB - Commissione Nazionale per le Società e la Borsa), to which this document has not been submitted for approval. Germany: SEBA is not licensed to conduct banking and financial activities in Germany nor is SEBA supervised by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), to which this document has not been submitted for approval. Hong-Kong: SEBA is not licensed to conduct banking and financial activities in Hong-Kong nor is SEBA supervised by banking and financial authorities in Hong-Kong, to which this document has not been submitted for approval. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Hong-Kong where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”). Netherlands: This publication has been produced by SEBA, which is not authorised to provide regulated services in the Netherlands. Portugal: SEBA is not licensed to conduct banking and financial activities in Portugal nor is SEBA supervised by the Portuguese regulators Bank of Portugal “Banco de Portugal” and Portuguese Securities Exchange Commission “Comissao do Mercado de Valores Mobiliarios”. Singapore: SEBA is not licensed to conduct banking and financial activities in SIngapore nor is SEBA supervised by banking and financial authorities in Singapore, to which this document has not been submitted for approval. This document was provided to you as a result of a request received by SEBA from you and/or persons entitled to make the request on your behalf. Should you have received the document erroneously, SEBA asks that you kindly destroy/delete it and inform SEBA immediately. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Singapore where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”). UK: This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product.

SEBA is not an authorised person for purposes of the Financial Services and Markets Act (FSMA), and accordingly, any information if deemed a financial promotion is provided only to persons in the UK reasonably believed to be of a kind to whom promotions may be communicated by an unauthorised person pursuant to an exemption under the FSMA (Financial Promotion) Order 2005 (the “FPO”). Such persons include: (a) persons having professional experience in matters relating to investments (“Investment Professionals”) and (b) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 49 of the FPO (“High Net Worth Businesses”). High Net Worth Businesses include: (i) a corporation which has called-up share capital or net assets of at least £5 million or is a member of a group in which includes a company with called-up share capital or net assets of at least £5 million (but where the corporation has more than 20 shareholders or it is a subsidiary of a company with more than 20 shareholders, the £5 million share capital / net assets requirement is reduced to £500,000); (ii) a partnership or unincorporated association with net assets of at least £5 million and (iii) a trustee of a trust which has had gross assets (i.e. total assets held before deduction of any liabilities) of at least £10 million at any time within the year preceding the promotion. Any financial promotion information is available only to such persons, and persons of any other description in the UK may not rely on the information in it. Most of the protections provided by the UK regulatory system, and compensation under the UK Financial Services Compensation Scheme, will not be available.

© SEBA / Kolinplatz 15, 6300 Zug, Switzerland

Research

more
Research report
Are blockchains that safe? How to attack them and how to prevent these attacks (Part 1)
24 September, 2020
In this edition of The Bridge, we explore some well-known attacks which are commonly used to compromise blockchain networks and discuss how consensus mechanisms such as Proof of Stake and Proof of Work may offer some (if limited) preventative measures to combat attacks.
Read more
Research report
Which crypto-asset regulation for the European Union?
17 September, 2020
In recent years, several European Union (EU) member states have developed their own crypto-asset regulations. The EU is now poised to introduce a single market regulation for crypto-assets.
Read more
Research report
DeFi: What happens when the music stops?
14 September, 2020
In this digital investor, we examine the latest crypto market developments. We compare the 2017-2018 ICOs wave with the current DeFi wave and investigate the sustainability of the liquidity mining trend. Finally, we analyse Yearn Finance by calculating the relative valuation of Yearn Finance based on its price to earnings ratio.
Read more

Join us as we redefine finance.

Contact us
seba

SEBA Bank AG
Kolinplatz 15
6300 Zug
Switzerland

ServicesCompanyNews & InsightsCareersContact
Receive the newest insights, research and news from SEBA directly to your inbox
Newsletter subscription
© 2020 SEBA Bank AG