In this Newsletter:

• Regulatory Developments: Payments

• Regulatory Developments: Digital Assets

• Market Developments

• Surveys and Reports

For previous editions of the Payments Newsletters, please visit our Financial Services practice page.

STOP PRESS: Hogan Lovells’ UK comparative guide to tokenized deposits, stablecoins and e-money 

As UK regulators continue their efforts to clarify the regulatory frameworks that will apply to each form of digital money and money-like instrument, we have recently published a short comparative guide, including what these instruments are and how they may be used in practice, as well as an overview of the relevant regulatory regimes.

Regulatory Developments: Payments

United Kingdom: PSR publishes letter on compliance activity ahead of APP fraud reimbursement policy implementation date

On 24 May 2024, the Payment Systems Regulator (PSR) published a letter that it sent to participants in its Faster Payment Scheme (FPS) authorised push payment (APP) scam reimbursement policy. Participants consist of all payment service providers (PSPs) that send or receive payments over the FPS.

Ahead of the 7 October 2024 implementation date for the APP scam reimbursement policy, the letter outlines four key areas for participants to focus on:

1. Understanding the new reimbursement requirements – all participants will need to consider whether the requirements apply to them as a sending and/or receiving PSP.
2. Claim management and data reporting through Pay.UK – Pay.UK has procured a reimbursement claim management system which will enable firms to communicate with each other and to manage APP scam claims.
3. Consumer awareness – firms will need to communicate the reimbursement requirements to consumers and notify them of protections available.
4. Improving fraud prevention – firms should consider the steps set out by the FCA on how to mitigate the risks of APP fraud.

Also, on 22 May 2024 the House of Commons Treasury Committee published a letter (dated 15 May 2024) from Chris Hemsley (PSR Managing Director) to Harriett Baldwin, Chair of the Committee, which provides an update on the PSR's progress in implementing measures to protect consumers and introduce better incentives on PSPs to prevent APP fraud. Among other things, the letter highlights key steps the PSR expects to see firms taking in preparation for the new reimbursement requirement.

European Union: EBA report on virtual IBANs

On 24 May 2024, the EBA published a report on virtual IBANs. The report highlights risks and challenges that virtual IBANs (vIBANs) may present to consumers, financial institutions, national competent authorities (NCAs) and to the integrity of the overall EU financial system, based on the six most common vIBAN use cases in the EU.

The report discusses examples of key risks posed by vIBANs, including:

• an unlevel playing field and regulatory arbitrage issues due to divergent interpretations of the applicable legislation by NCAs in different Member States;
• Money laundering / terrorist financing (ML/TF) risk as the end users of vIBANs may be unknown to payment service providers (PSPs);
• Consumer detriment due to the lack of transparency of certain key information, for example on the applicable complaints procedures or the deposit guarantee scheme which protects the consumer.

The report offers some suggestions about the actions that could be taken by PSPs, the co-legislators and NCAs to mitigate the identified risks.

United Kingdom: HM Treasury makes access to cash designations

On 24 May 2024, HM Treasury published designation notices confirming that the following firms have been designated as relevant current account providers under Part 8B of the Financial Services and Markets Act 2000 (FSMA 2000) for the provision of cash access services:

• Barclays Bank UK plc (UK wide)
• National Westminster Bank plc & The Royal Bank of Scotland plc (NatWest Group) (UK wide)
• Lloyds Bank plc and Bank of Scotland plc (Lloyds Banking Group) (UK wide)
• Santander UK plc  (UK wide)
• HSBC UK Bank plc (UK wide)
• Nationwide Building Society (UK wide)
• TSB Bank plc (Great Britain only)
• Clydesdale Bank plc (Virgin Money) (Great Britain only)
• The Co-operative Bank plc (Great Britain only)
• Northern Bank Limited (Northern Ireland only)
• Bank of Ireland (UK) plc (Northern Ireland only)
• AIB Group (UK) plc (Northern Ireland only)

HM Treasury is entitled to designate a person if it is satisfied that doing so is likely to further the purpose of seeking to ensure reasonable provision of cash access services. As a result of the designations, these providers must comply with rules made by the FCA as part of the access to cash framework. The FCA’s consultation on new rules to maintain reasonable access to cash for personal and business customers across the UK closed in February 2024. See our previous Engage article on the consultation for more information. The FCA is expected to finalise its rules and publish a policy statement in Q3 this year (although this timing could be affected by the UK General Election which also impacts the work of the regulators).

Additionally, Link Scheme Limited and Link Scheme Holdings (UK wide) have been designated as an operator of cash access coordination arrangements.

The designations came into effect on 24 May 2024.

United Kingdom: Open Banking Limited publishes response to proposal for UK open banking entity

On 20 May 2024, Open Banking Limited (OBL) published a response to the Joint Regulatory Oversight Committee’s (JROC) recommendations on the design of the future entity for open banking in the UK.

As reported on in last month’s Newsletter, the JROC had published its proposals for the design of an entity that will replace OBL as well as for the establishment of an interim entity.

In its response, OBL referred to the principle of commonality as key to the attainment of the open banking vision. According to OBL, all open banking activities should share a common vision and purpose, to deliver enhancements for the benefit of the wider ecosystem, including consumers, businesses and the UK economy as a whole.

OBL proposed the following enhancements to the JROC’s recommendations:

1. Ensuring OBL is able to discharge its corporate governance obligations in relation to the interim entity;
2. Clarifying the nature of the interim entity CEO role;
3. Provision of Chief Risk Officer (CRO) services to the interim entity;
4. Managing the implications for OBL’s people;
5. Ensuring the CMA Order is protected and managing potential priority conflicts between OBL and the interim entity;
6. Maintaining the momentum on the JROC workstreams whilst the interim entity is being established; and
7. Clarifying the roles of OBL and the interim entity.

The JROC’s consultation closed on 20 May 2024 and it will publish a summary of the feedback.

United Kingdom: PSR publishes change to specific directions on supply of card-acquiring services

On 29 May 2024, the Payment Systems Regulator (PSR) published a policy statement which confirms revisions to Specific Directions 14, 15 and 16. These Specific Directions relate to the supply of card-acquiring services. The changes are set out in a separate document.

The changes follow a consultation that took place in January 2024 and which was covered in the December 2023/January 2024 edition of the Newsletter. A summary of the responses to the consultation has also been published.

The changes will update the list of directed legal entities and they also include a process for a payment service provider (PSP) to which relevant business is transferred to automatically become a directed PSP. The PSR hopes that this will remove uncertainty and ensure continuity (while avoiding the need for a direction to be given to achieve the same outcome).

Following stakeholder feedback, the PSR has decided not to direct Checkout Ltd at this time (as previously consulted on). However, it will keep the list of directed firms under review.

China: Government may introduce a new mobile payments regulation

On 5 June 2024, it was reported that the Chinese government is planning to introduce a new mobile payment regulation. The regulation is intended to reduce the market share of WeChat, similar to the rules in India which aim to tackle the dominance of players such as Google Pay.

As reported in the May edition of the Newsletter, the Indian government has recently announced a delay in another cap on market share in Unified Payment Interface instant digital payments services.

Global: BIS publishes report on framework for anomaly detection in payment systems using machine learning

In May 2024, the Bank for International Settlements (BIS) published a report on a potential machine learning framework for anomaly detection in payment systems. The report proposes a flexible machine learning framework for real-time transaction monitoring in high-value payment systems. This framework can be used by system operators and overseers to detect anomalous transactions. If anomalies are caused by a cyber-attack or an operational outage and left undetected, they could have serious implications for payment systems, their participants and the financial system more broadly.

United Kingdom: PSR appoints Interim Managing Director

On 3 June 2024, the Payment Systems Regulator (PSR) announced that it has appointed David Geale (formerly FCA Director of Retail Banking) as Interim Managing Director of the PSR, with effect from 10 June 2024 and for a period of nine months. This follows an announcement that Chris Hemsley, PSR Managing Director, would be leaving the PSR with effect from 7 June 2024.

Regulatory Developments: Digital Assets

Ireland: CBI speech on key aspects of a successful authorisation application under MiCA

On 29 May 2024, Blockchain Ireland week included a keynote address delivered by Mr. Gerry Cross, Director of Financial Regulation (Policy and Risk) at the Central Bank of Ireland (CBI). The address provided insight on how to be innovative within the confines of the financial regulatory space. It also considered the EU Markets in Crypto Assets Regulation (MiCA)  and the key aspects that result in a successful authorisation application alongside some initial supervisory expectations.

For more on the CBI speech, take a look at this Engage article.

United States: House of Representatives votes to pass FIT21

On 22 May 2024, the U.S. House of Representatives voted to pass the Financial Innovation and Technology for the 21st Century Act (FIT21), a bipartisan effort to put in place federal rules over digital asset markets. FIT21 now goes to the Senate, and the future of the initiative remains unclear.

The Securities and Exchange Commission (SEC) chair, Gary Gensler, published a statement which said that the bill would remove blockchain-recorded investment contracts from the statutory definition of securities. According to Gensler, this risks diluting the protections of the federal securities laws.

FIT21 also allows issuers of crypto investment contracts to self-certify that their products are a “decentralized” system and then be deemed a special class of “digital commodities”, which will bring them outside the purview of the SEC.

The Netherlands: First MiCA newsletter published

On 13 May 2024, the Dutch Authority for the Financial Markets, Autoriteit Financiële Markten (AFM), published its first Markets in Crypto-Assets Regulation (MiCA) newsletter.

The AFM noted the overlap between MiCA and the Digital Operational Resilience Act (DORA), for example on requirements such as:

• ICT-governance arrangements

  • ICT-risk management

  • Business continuity

• Third-party risk management

  • Outsourcing

In the newsletter, the AFM said that cryptoasset service providers (CASPs) should include finalised policies and procedures in the CASP licence application in accordance with, amongst others, Article 68 paragraphs 7 and 8 of MiCA and the MiCA Regulatory Technical Standards on authorisation of cryptoasset providers (Article 9).

Global: Overview of recent Central Bank Digital Currency (CBDC) developments

United Kingdom: Bank of England publishes report on digital pound in design phase

On 16 May 2024, the Bank of England (BoE) published a report on the digital pound. This report is part of the BoE’s work to conduct experiments and proofs of concept in collaboration with private sector innovators and a range of stakeholders.

No decision has been taken on whether or not to build a digital pound and the experiment referred to in the report aimed to assess the technical feasibility and technology and policy implementations of potential digital pound design features.

The purpose of the experiment reported on was to assess the technical feasibility of using existing point-of-sale (POS) hardware, as currently used in the UK, to initiate digital pound payments. This involved a proof of concept that used Europay, Mastercard and Visa (EMV) standards to send payment instructions from smart cards to POS devices, and then to an application programming interface (API). EMV is a set of technical specifications which enable card-based payments to be consistently accepted across different payment schemes.

The experiment demonstrated that existing POS terminals in the UK could, in principle, be used without modification to make online digital pound payments. Some modification would be required for offline payments.

Hong Kong: Second trial of digital currency

On 27 May 2024, it was reported that the Hong Kong Monetary Authority (HKMA) is progressing towards the next phase of its experiment with its digital currency, e-HKD.

The HKMA had first experimented with e-HKD in a six-month long pilot that concluded in October 2023.

The upcoming test will consider the use of e-HKD for pricing and disbursing mortgages. The experiment will delve deeper into the technology, business model and legislation relating to e-HKD transactions.

Hong Kong: Expansion of digital currency pilot for cross-boundary payments

On 17 May 2024, the HKMA announced the expansion of the e-CNY pilot for cross-boundary payments. This will facilitate the set up and use of e-CNY wallets by Hong Kong residents, which can be used for cross-boundary payments but cannot be used for person-to-person transfers.  The expansion will also enable the top-up of e-CNY wallets through the Faster Payment System (FPS). Users will now be able to set up e-CNY personal wallets in Hong Kong using only their Hong Kong mobile phone numbers.

This development is part of the People’s Bank of China’s ‘three connection, three facilitation’ initiative that was announced at the start of this year.

European Union: ECB publishes presentation on digital euro

On 10 May 2024, the European Central Bank (ECB) published slides from a presentation by Piero Cipollone, a member of the Executive Board of the ECB. The slides include information on the rationale and key design choices of the digital euro, the role of payment service providers (PSPs), as well as a project timeline. According to the slides, digital euro distribution would be carried out exclusively by PSPs, who would maintain customer relations.

The project is currently in its ‘preparation phase’ until October 2025. Expected next steps are to:

1. Finalise the scheme rulebook

2. Select service providers

3. Learn through experimenting

4. Dive deeper into technical aspects, including conducting further research into offline functions and developing a testing and rollout plan for the future

The ECB has also published a slide illustrating the framework for digital euro project governance and stakeholder management. The slide sets out the relationship between European institutions and policymakers, market stakeholders, and the Governing Council and Executive Board.

Global: BIS Innovation Hub announcement on Project mBridge

On 5 June 2024, the Bank for International Settlements (BIS) Innovation Hub announced that Project mBridge has reached minimum viable product stage. The project aims to explore a multi-CBDC platform shared among participating central banks and commercial banks, built on distributed ledger technology (DLT) to enable instant cross-border payments and settlement. Project mBridge is now inviting private sector firms to propose new solutions and use cases that help develop the platform and showcase all its potential. Interested firms can apply to participate via the participation form.

Global: BIS launches Project Rialto

On 4 June 2024, the Bank for International Settlements (BIS) announced the launch of Project Rialto to explore how instant cross-border payments could be improved using a modular foreign exchange (FX) component combined with settlement in wholesale central bank digital currencies (wCBDC). Project Rialto is a collaboration of the BIS Innovation Hub, Eurosystem and Singapore Centres in partnership with several central banks. It explores a new automatic FX settlement layer solution using wCBDC as a safe settlement asset that could be deployed for interlinked instant payment systems or digital asset systems.

European Union: Delegated Regulations supplementing MiCA published in Official Journal

On 30 May 2024, the Official Journal of the European Union published Delegated Regulations which supplement the EU Markets in Crypto-Assets Regulation (MiCA) on the following topics:

1. the criteria for the classification of asset-referenced tokens (ARTs) and e-money tokens (EMTs) as significant;
2. the fees charged by the EBA to issuers of significant ARTs and significant EMTs;
3. the criteria to be considered by ESMA, the EBA and other authorities in relation to their intervention powers; and
4. the procedural rules for the exercise of the EBA’s power to impose fines or penalty payments on issuers of ARTs and EMTs.

The Delegated Regulations will enter into force on 19 June 2024.

United Kingdom: ICMA responds to Digital Securities Sandbox consultation

On 29 May 2024, the International Capital Market Association (ICMA) submitted its response to the Bank of England and the FCA’s joint consultation on the proposal to establish a Digital Securities Sandbox.

The response stated that ICMA members are supportive of the draft guidance on the operation of the Digital Securities Sandbox, subject to:

1. adopting a more flexible approach to applying limits at Go live (Stage 3) on a firm-by-firm basis;

2. additional flexibility for Digital Security Depositories (DSDs) to scale (move to Stage 4) on a continuous basis rather than T+15-18 months into the Sandbox; and

3. flexibility to issue securities onto a platform that may be denominated in non-sterling currencies within the Sandbox.

European Union: ESMA publishes final report on conflict of interest requirements in MiCA

On 31 May 2024, ESMA published a final report on the rules on conflicts of interests of cryptoasset service providers (CASPs) under the EU Markets in Crypto-Assets Regulation (MiCA).

In the report, ESMA sets out draft Regulatory Technical Standards on certain requirements in relation to conflicts of interest for CASPs under MiCA, with a view to clarifying elements in relation to vertical integration of CASPs and to further align with the draft EBA rules applicable to issuers of asset-referenced tokens (ARTs). The RTS also contain updates on: (1) requirements for the policies and procedures for the identification, prevention, management, and disclosure of conflicts of interest, considering the scale, the nature and the range of crypto-asset services provided, as well as (2)details and methodology for the content of the disclosures of conflicts of interest.

The final report has been sent to the European Commission (EC), which now has 3 months to decide whether to adopt the draft RTS. ESMA will provide further advice and technical guidance in this area if requested by the EC.

European Union: EBA publishes Guidelines and RTS under MiCA

On 6 June 2024 the EBA published three regulatory products under the EU Markets in Crypto-Assets Regulation (MiCA):

• Final draft Guidelines on the minimum content of the governance arrangements for issuers of ARTs that specify further the various governance provisions in MiCA, taking into account the principle of proportionality. In addition, these Guidelines clarify the tasks, responsibilities and organisation of the management body, and the organisational arrangements of issuers, including the sound management of risks across all the three lines of defence.
• Final draft Regulatory Technical Standards (RTS) on the minimum content of the governance arrangements on the remuneration policy. The RTS are applicable to issuers of significant asset-referenced tokens (ARTs) and electronic money institutions issuing significant e-money tokens (EMTs), and, where Member States require to apply Article 45(1) MiCA, to issuers of non-significant EMTs.
• Final draft RTS on conflicts of interest for issuers of ARTs that specify the requirements for policies and procedures on conflicts of interest (CoI).

According to the final draft Guidelines, they will apply from 3 months after the date of their publication on the EBA’s website in all EU official languages. The EBA will now submit the draft RTS to the European Commission for adoption.

European Union: EUBAF publishes report on future trends for blockchain technology

On 24 May 2024, the European Blockchain Observatory and Forum (EUBAF), an initiative of the European Commission, published a conclusion report providing insights into future trends and policy actions for blockchain technology in Europe. The report identifies several emerging trends poised to shape the blockchain landscape, including the convergence of blockchain with artificial intelligence, the growth of decentralised finance (DeFi), enhanced interoperability between blockchain networks, and a push towards more sustainable and energy-efficient blockchain solutions.

United Kingdom: FMLC publishes paper on ‘Digital assets: governing law and jurisdiction’

On 6 June 2024, the Financial Markets Law Committee (FMLC) published a paper on ‘Digital assets: governing law and jurisdiction’.

In light of developments in the sector since the FMLC published a paper on the issues in 2018, this latest paper reconsiders the remaining uncertainties in the conflict of law rules that should be applied to distributed ledger technology (DLT) systems and digital assets and makes recommendations on how conflicts of law rules should develop to address those uncertainties.

Market Developments

Africa: Revolut expands Mobile Wallets offering

On 28 May 2024, it was reported that the UK challenger bank Revolut has expanded its Mobile Wallets feature with 14 new payment corridors. This includes nine African countries and three digital wallets. Following the expansion, users will be able to benefit from faster transfers from Europe to Africa.

Global: PayPal to build advertising platform

On 28 May 2024, PayPal announced that it will build a new advertising platform and accelerate consumer product innovation. Following the appointment of a new General Manager, the business will use customer insights to build a personalised platform that will aim to drive better advertising spend performance for merchants.

United States: New York Stock Exchange to launch financial products tracking spot bitcoin prices

On 29 May 2024, it was announced that the New York Stock Exchange (NYSE) will partner with CoinDesk Indices’ XBX to list index options tracking the price of bitcoin. According to the NYSE, once regulatory approval is obtained, the options contracts will aim to offer investors access to a liquid and transparent risk-management tool.

Latin America and Europe: Mastercard trials Crypto Credential network

On 29 May 2024, it was announced that Mastercard Crypto Credential has undertaken its first peer-to-peer pilot transactions. Using the network, crypto exchange users will be able to send and receive crypto using their Mastercard Crypto Credential aliases. These aliases replace the longer and more complicated blockchain addresses that are usually used. 

The live transaction capabilities operate on the Bit2Me, Lirium and Mercado Bitcoin exchanges. These exchanges enable blockchain transactions between Latin American and European corridors.

United Kingdom: Bank of London announces strategic partnership with allpay

On 31 May 2024, the Bank of London and allpay, a payment services provider in the UK public and social housing sector, announced a strategic partnership to make payments more accessible through prepaid cards. The partnership will operate to grow the prepaid card business in the public sector and support organisations focused on providing targeted care and support.

Global: Swift collaborates with global banks to combat fraud with AI

On 30 May 2024, the global financial messaging service Swift announced that it had partnered with leading banks to utilise AI for the reduction of cross-border payment fraud. Banks such as BNY Mellon, Deutsche Bank, DNB, HSBC, Intesa Sanpaolo and Standard Bank are part of the project.

The collaboration will entail two pilots:

1. Enhancement of the existing Payment Controls service by using an AI model to analyse potential fraud activity.
2. Advanced AI to analyse confidentially shared data, with potential use cases in assessing cybersecurity threats.

United Kingdom: Plain Numbers joins with Visa to improve inclusivity

On 4 June 2024, it was announced that Visa had entered a strategic collaboration with Plain Numbers to improve communications around government disbursements. The collaboration will aim to enable inclusive financial services for adults in the UK and foster access to the global economy.

Africa: Digital Finance Africa 2024 conference to take place in July

On 5 June 2024, it was reported that the IT News Africa Digital Finance Africa 2024 conference will take place on 4 July 2024. The theme will be “Empowering Africa’s Financial Future: FinTech Innovations for Inclusive Growth”. Items on the agenda include:

• Navigating cybersecurity risks
• The role of AI in banking
• The future of cryptocurrencies in Africa
• Scaling and profitability challenges in African FinTech
• Capital constraints
• The evolving role of central banks in shaping a digital economy

India: Stripe limits activity in Indian market

In May 2024, Stripe, the U.S. digital payments company, announced that it has shifted to an ‘invites only’ model in India as a result of regulatory changes. The new model means that merchants will need to request an invitation and await approval before joining the payment aggregator. Stripe referred to the evolving regulatory landscape in India as the reason for the change.

Global: Mastercard updates Open Banking platform

On 6 June 2024, it was reported that Mastercard has updated its Open Banking platform to ease account opening and updating. According to the report, Mastercard’s Deposit Switch will allow customers to automatically switch their direct deposits and, through Bill Pay Switch, update their recurring bill payments when they open or update an account.

United Kingdom: First multi-bank ATM deposit service launched

On 5 June 2024, Cash Access UK announced that new multi-bank deposit ATMs have been set up across the country. The development follows collaboration between major banks to provide a multi-bank automated deposit service. The new deposit machines will offer easy access to cash services such as withdrawals, balance enquiries and PIN management.

United States: Ibanera announces partnership with FedNow on real-time payments

On 11 June 2024, digital banking platform Ibanera announced that it has partnered with the Federal Reserve’s FedNow Service to provide real-time payments in the U.S. According to the announcement, this strategic collaboration is a significant development for Ibanera’s API driven banking ecosystem, enabling it to further support fintechs and other businesses with ‘lightning-fast transactions, available 24/7/365’.

Surveys and Reports

Global: Juniper Research publishes report and whitepaper on global modern card issuing platforms market

On 3 June 2024, Juniper Research announced the publication of its report ‘Global Modern Card Issuing Platforms Market 2024-2029’ (extract available via registration). A complimentary whitepaper, ‘Modern Card Issuing: A Personalisation Revolution’, which was published alongside the report, examines the state of the modern card issuing market.

According to Juniper Research, modern card issuing platforms are: ‘Vehicles that allow card issuers to create cards using an API (Application Programming Interface)-driven approach; enabling cards to be delivered instantly to digital wallets, with the option for a physical card boosting flexibility significantly.’

The whitepaper predicts that the number of cards issued by modern card issuing platforms will double from 748 million in 2024 to 1.4 billion in 2029. It suggests that in order to remain competitive against digital-only banks, traditional banks must adopt modern card issuing platforms to respond to rapidly changing consumer trends and improve user experience.

Global: Convera launches Fintech 2025+ report

On 5 June 2024, Convera announced the publication of its 'Fintech 2025+' report (registration required) which was developed in partnership with Oxford Economics and The Paypers.

The report aims to provide in-depth analysis of the current and future state of the fintech sector, highlighting the crucial role of cross-border payments in international trade and finance.

Some points from the report include:

• the wholesale cross-border payments market is expected to grow 54% to reach a huge $225 trillion by 2030;

• real-time payment transactions are expected to reach 511.7 billion by 2027, representing a 21.3% annual growth rate driven by consumer demand for instant transactions, facilitated by mobile wallets and digital apps; and

• open banking is set to transform payments, and embedded finance - supported by Banking as a Service (BaaS) - is expected to lead to significant growth, with embedded finance’s potential predicted to reach USD 7.2 trillion in the next decade.

Authored by Grace Wyatt, Virginia Montgomery, and Ada Nourell.

^{Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.}