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SEC fines two investment advisers over AI claims
The U.S. Securities and Exchange Commission (SEC) settled charges against two investment advisers, Delphia and Global Predictions, on the grounds that the firms allegedly made false and misleading statements about their supposed use of artificial intelligence (AI).
More detail on Delphia: According to the SEC’s order against Delphia, from 2019 to 2023, the firm made false and misleading statements in its SEC filings, in a press release, and on its website related to its supposed use of AI and machine learning which incorporated client data in its investment process.
The order found that these statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed.
More detail on Global Predictions: In the order against Global Predictions, the Commission found that the firm made false and misleading claims in 2023 on its website and on social media about its supposed use of AI.
Notably, the firm claimed to be the “first regulated AI financial advisor” and, according to the Commission, misrepresented that its platform provided “[e]xpert AI-driven forecasts.”
Consequences: Delphia and Global Predictions consented to the entry of orders finding that they violated the Advisers Act.
The firms were also ordered to be censured and to cease and desist from violating the charged provisions; neither firm admitted wrongdoing in agreeing to the orders
Delphia agreed to pay a civil penalty of $225,000, and Global Predictions agreed to pay a civil penalty of $175,000
European Parliament adopts EU AI Act
The Plenary of the European Parliament adopted the AI Act representing a key step towards the final adoption of the first comprehensive legal framework for regulating Artificial Intelligence (AI).
Final rules should be available and adopted by mid-year
Technical rules implementing the framework will be developed in coming months
What does the vote mean in practice? The vote is part of the legislative procedure to adopt the AI Act, with the final adoption is planned for next month.
Is the final text of the rules available? The European Parliament published a newer version of the final text for the vote, which includes a number of clarifications compared to the previous edition. It is understood that the text is not final yet and legal-linguist experts are still working on it. The EU Commission hopes to have a final text next month.
What are the next steps? The planned timeline for adoption remains unchanged:
April: Final AI Act formal adoption by EU Parliament and EU member states
Late April/May: AI Act to be published in EU Official Journal
May: AI Act to enter into force in late May, with prohibitions of AI systems applying 6 months later from 2025
Technical rules, guidelines and Codes of conduct will be developed in coming months to facilitate the full application of the regime by mid-2026.
Hong Kong unveils Project Ensemble to support development of the Hong Kong tokenization market
The Hong Kong Monetary Authority (HKMA) announced the commencement of Project Ensemble, a new wholesale central bank digital currency (wCBDC) project to render support to the development of the tokenisation market in Hong Kong.
In more detail: The new project will explore new financial market infrastructure (FMI) to facilitate seamless interbank settlement of tokenized money through wCBDC.
The project will initially focus on tokenized deposits – a digital representation of commercial bank deposits – issued by commercial banks and made available to the general public.
With wCBDC as the foundation, tokenized deposits can be used for tokenized asset transactions.
Important context: At the core of Project Ensemble is a wCBDC Sandbox that the HKMA will launch this year to further research and test tokenization use cases that include, among others, settlement of tokenized real world assets (e.g. green bonds, carbon credits, aircraft, electric vehicle charging stations, electronic bills of lading and treasury management).
It could potentially forge a new FMI that bridges the existing gap between tokenized real world assets and money in transactions.
Looking ahead: To help set industry standards and a future-proof strategy, the HKMA will form a wCBDC Architecture Community consisting of local and multinational banks, key players in the digital asset industry, technology companies and the CBDC Expert Group.
The HKMA will also continue to partner with Cyberport and Hong Kong Science and Technology Parks Corporation to foster the development of asset tokenization and support homegrown fintech innovation
If the wCBDC Sandbox garners sufficient interest from the industry then the HKMA will conduct a “live” issuance of the wCBDC at the appropriate time
FCA updates position on crypto asset Exchange Traded Notes for professional investors
The UK Financial Conduct Authority (FCA) has issued a statement clarifying that it will not object to requests from Recognised Investment Exchanges (RIEs) to create a UK-listed market segment for crypto asset-backed Exchange Traded Notes (cETNs).
Professional investor focus: These products would be available for professional investors, such as investment firms and credit institutions authorized or regulated to operate in financial markets only.
Exchanges will need to continue to make sure sufficient controls are in place, so trading is orderly and proper protection is afforded to professional investors
cETNs must meet all the requirements of the UK Listing Regime, for example on prospectuses and on-going disclosure
With increased insight and data due to a longer period of trading history, the FCA believes exchanges and professional investors should now be able to better establish whether cETNs meet their risk appetite
Continued ban on crypto derivatives for retail derivatives: The FCA continues to believe cETNs and crypto derivatives are ill-suited for retail consumers due to the harm they pose. As a result, the ban on the sale of cETNs (and crypto derivatives) to retail consumers remains in place.
Wider context: The FCA continues to develop the UK’s crypto asset regulatory regime as part of an effort to lead international standards in this space.
EU Commission adopts first group of detailed measures under DORA
The EU Commission has adopted three final rules, or Delegated Regulations, containing regulatory technical standards (RTS) supplementing the EU Digital Operational Resilience Act (DORA) Regulation, following the publication of final drafts of these rules by the EU Supervisory Authorities in January 2024.
In more detail: These include:
The criteria for the classification of ICT-related incidents and cyber threats, setting out materiality thresholds and specifying the details of reports of major incidents
The detailed content of the policy regarding contractual arrangements on the use of ICT services supporting critical or important functions provided by ICT third-party service providers
ICT risk management tools, methods, processes, and policies and the simplified ICT risk management framework
Closely related: The EU Commission also recently adopted final rules supplementing DORA with provisions relating to the definition of the criticality criteria and oversight fees for ICT third-party service providers.
Next steps: The final rules have now been sent to the EU Parliament and Council for a three-month scrutiny period. If no objections are raised, they will enter into force in Q2 2024 following publication in the EU Official Journal.
ASIC Commissioner sets out regulatory agenda for crypto and digital assets
Commissioner at the Australian Securities and Investments Commission Alan Kirkland set out in a speech Australia’s regulatory position with regard to crypto, digital assets and decentralized finance.
Context: There are currently a range of significant regulatory reforms underway in Australia designed to encourage financial innovation while ensuring consumer protection and market integrity.
Regulatory reforms underway: The Australian Government released its proposed framework for regulating digital asset platforms in October 2023 to incorporate digital asset platforms within the existing financial services framework.
Currently ASIC only regulates crypto assets and businesses to the extent they involve financial services and the question as to whether a particular crypto asset is a financial product will remain critical if the new regime is legislated as proposed
ASIC is already thinking about implementation, particularly as the new regime will mean a significant uplift in the operations of various industry participants and certain platform providers will face additional obligations
Enforcement: Kirkland underlined that ASIC will take action where they see the most serious harm – or a risk of it – and in cases most likely to send a strong message of deterrence to others.
SEC Sanctioned by Federal Judge in DEBT Box Case
A U.S. federal judge ruled that the Securities and Exchange Commission (SEC) engaged in a “gross abuse of the power entrusted to it by Congress” in its case against the blockchain firm Digital Licensing, which does business as DEBT Box.
Last July, the Commission sued DEBT Box alleging it had defrauded investors of approximately $50 million
Chief District Judge Robert Shelby said in a ruling that the SEC had acted in “bad faith” and had been “deliberately perpetuating falsehoods” as it went about trying to freeze DEBT Box assets and obtain a temporary restraining order against the firm
As an example, the Commission had accused DEBT Box of attempting to move assets overseas to the United Arab Emirates to skirt U.S. securities laws, and based those allegations on a YouTube video the firm posted
Judge Shelby also sanctioned the SEC, and ordered the Commission to pay the attorney fees and legal costs for DEBT Box. Shelby also clarified that his ruling “should not be construed as offering any views on the underlying merits of the case” and was aimed only at the Commission’s misconduct
Biden 2025 budget includes digital asset trading rules, new taxes on mining
President Joe Biden has released his 2025 budget proposal. Biden’s proposal contains a number of provisions aimed at the cryptocurrency industry, including a wash sale rule for digital assets and an excise tax for crypto-mining operations.
If approved, Biden’s $7.3 trillion budget proposal would modify the tax code to clamp down on crypto “wash sales”. Wash sales are when a cryptocurrency holder sells an asset at a loss, just to buy it back almost immediately, in an attempt to lessen their tax burden
Biden’s proposed budget would also apply a 30% excise tax corresponding to the cost of energy used by crypto mining firms, according to the U.S. Treasury Department’s annual “greenbook”
It is unlikely that the proposal will be enacted in full, but parts may be included in the final federal budget agreement
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