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Welcome to Regulatory Roundup, in which we’ll review some of the most recent trends in regulation – both regionally and globally, as well as any major regulatory updates and enforcement actions from the past month.
Each month we’ll do a deep dive into a single topic around market integrity or financial crime, along with a summary of the most interesting regulatory news. Given the flurry of recent activity, this month we’ll briefly cover multiple topics.
Crypto Crackdown
Firstly, it’s been a busy month in the U.S. and EU for crypto regulation. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have taken a more assertive stance on crypto, with the SEC charging Coinbase with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. Separately it requested to freeze Binance’s U.S. assets following a series of allegations, including wash trading. The SEC’s stance rings true to the themes recently outlined in the International Organization of Securities Commissions (IOSCO) policy consultation on crypto markets, where the first few recommendations focused on entities that “engaged in multiple functions and activities ‘under-one roof’” and required entities to meet the obligations for each role they engage in whilst Chapter 5 calls out wash trading as a type of abusive behavior.
In the EU, the landmark Markets in Crypto Assets (MiCA) legislation was passed, which provides a framework for crypto asset regulation across the EU. Many of the articles outlined in MiCA are aligned with the guidance provided by the recent IOSCO consultation. Articles 77-80 specifically address market integrity and we cover it in more detail here.
Retail, social media, and AI…
In non-crypto news, IOSCO published a report on retail market activity. Retail activity has grown globally. Take the U.S. for example, where retail market participation increased from an average of 10% pre-pandemic to a high of 26% in 2021. Today, retail participation in the U.S. markets remains above 20% with macro and demographic trends, meaning it will likely stay high. The IOSCO report identified retail investors as particularly vulnerable to misconduct, fraud, and the influence of social media. Of specific interest is the increased involvement of social media or “finfluencers.” The Hong Kong Securities and Futures Commission (SFC) noted that 20% of its manipulation cases involved pump-and-dump schemes influenced by popular social media platforms. They also found that 49% of retail investors obtained information from social media, which is in line with a survey by the Autorite des Marches Financiers (AMF) in Quebec. Of those that took investment information from social media, the Australian Securities & Investments Commission (ASIC) found that the most popular source was by far YouTube at 20%, followed by Facebook at 11%, Podcasts at 10%, and “financial influencers” at 10%.
Separately, but related, is the recent incident of a fake AI-generated image of an explosion at the Pentagon, which made the rounds on both broader and financial markets-focused social media. The news reported a dip in the markets, but it wasn’t too far outside of current volatility. What’s more interesting is that this may be the first sign of others to come. The potential for market disruption or use in manipulation is worrying. Deepfakes and fake news already exist, but advances in AI have simplified the process and allowed for greater scale and harder detection. At the same time, social media, where these things spread, has an increasing influence on financial markets. The path this will go down is unclear, but this is certainly something we need to be thinking about and something that is impacting markets on a global scale.
Regulation in a more complex world
Finally, I’d like to highlight two interesting actions by the CFTC in recent weeks. Firstly, the CFTC petitioned a federal judge to charge a decentralized autonomous organization (DAO), Ooki DAO, with a violation of federal commodities laws. By doing so, the CFTC has set a precedent in defining that Ooki DAO could be treated as a “person” under the Commodity Exchange Act, meaning that they can be held liable for all violations of the law. This was through arguing that they can be defined as an unincorporated association, a type of informal entity that is created when people join together and cooperate towards a common goal. Secondly, the CFTC fined HSBC $45 million for spoofing in voice-brokered swaps, which I believe is the first spoofing prosecution in this type of trading and asset. These two cases show how regulators are increasingly needing to look beyond the standard playbook to deal with the new complexities of the financial markets.
Regulatory Updates & News
15 June: The Insider Dealing (Securities and Regulated Markets) Order 2023 took effect. It amends the Criminal Justice Act 1993, which sets out the UK’s criminal insider dealing regime, to align the types of securities and markets that are subject to the criminal insider dealing offenses with the scope of securities and markets covered by the civil regime in the UK version of the Market Abuse Regulation.
14 June: The Council of EU has agreed to its negotiating mandate on the listing act. In relation to market integrity the Act proposes a set of measures for sharing of orderbook data between EU regulators to support their efforts in fighting market abuse.
12 June: The SEC charged investment adviser Sabby Management LLC and its managing partner, Hal D. Mintz, with fraud in connection with a long-running scheme involving misrepresentations and violations of rules for short selling and order making, as well as other violative trading, that generated more than $2 million in illegal profits. Additionally, as the complaint alleges, on occasion Sabby and Mintz used their naked short selling to artificially deflate the price of securities, allowing them to obtain more shares at a cheaper price.
7 June: The SEC adopted final rules proposed in the aftermath of the 2021 Archegos collapse that aim to prevent fraud in security-based swap transactions and uphold the authority of swap dealer CCOs. SEC Chair Gensler said in a statement that any misconduct in the security-based swaps market “not only harms direct counterparties but also can affect reference entities and investors in those reference entities.”
31 May: ESMA informed stakeholders that the amended RTS 1 and RTS 2, under MiFIR, will start applying on 5 June 2023. Some of the amendments will have an impact on the transparency calculations for equity, equity-like and non-equity instruments.
30 May: The SEC announced that former Coinbase product manager Ishan Wahi and his brother, Nikhil Wahi, agreed to settle charges that they engaged in insider trading through a scheme to trade ahead of multiple announcements regarding at least nine crypto asset securities that would be made available for trading on the Coinbase platform. Ishan and Nikhil Wahi each agreed to be permanently enjoined from violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 and to pay disgorgement of ill-gotten gains, plus prejudgment interest.
26 May: The European Systemic Risk Board (ESRB) has published a report outlining the systemic implications of crypto markets and proposing policy options to address the risks stemming from crypto assets and decentralized finance (DeFi).
25 May: The European Parliament think tank has published a study on remaining regulatory challenges in digital finance and crypto assets after MiCA regarding Decentralized Finance (DeFi), non-fungible tokens (NFTs) for financial use, crypto staking/lending, the use of non-formal communication means and sustainability-related matters.
25 May: World Economic Forum has published the report “Pathways to Crypto-Asset Regulation: A Global Approach,” which identifies top barriers and potential solutions in global Crypto-Asset Regulation. The report concluded that fragmented regulation enforcement, uneven monitoring, and differing classification of crypto assets are hampering a globally coordinated approach to crypto regulation. As such, regulators and industry players should explore alternative regulatory pathways to collaborate and regulate the crypto-asset ecosystem through a principle-based, agile approach that takes local context into consideration.
25 May: ESMA has issued a public statement to warn investors of risks that arise when investment firms offer both regulated and unregulated products and/or services. Examples of such products and services that, that could fall outside the scope of financial services regulation include crypto assets, real estate, gold, raw materials, certain non-transferable securities (for example non-transferable loan notes).
23 May: IOSCO issued a public consultation on its recommendations to improve global standards for the regulation of crypto assets. The report aims to finalize the recommendations by the end of the year. IOSCO specifically advised regulators to prohibit crypto companies “from combining certain functions in a single legal entity or group of affiliated entities,” such as prohibiting crypto companies from also running exchanges, trading firms, and custody businesses under the same legal entity.
17 May: The UK Treasury Committee has published a report on crypto trading stating that consumer trading in unbacked crypto should be treated as and potentially be regulated as gambling. The Committee concludes that cryptocurrencies pose significant risks to consumers, given their price volatility and the risk of losses. Stating retail trading in unbacked crypto more closely resembles gambling than a financial service, the MPs call on the Government to regulate it as such.
Fines & Enforcement Actions
SEC Awards Whistleblower
The SEC awarded $279 million, its largest award ever, to an unnamed whistleblower that led to enforcement actions by the SEC and other agencies. Neither the name of the whistleblower nor the case it is connected to were made public.
CFTC Charges HSBC
The Commodity Futures Trading Commission issued an order simultaneously filing and settling charges against HSBC Bank USA, N.A. (HSBC), a provisionally registered swap dealer. The order charges HSBC with manipulative and deceptive trading related to swaps with bond issuers, spoofing, and supervision and mobile device recordkeeping failures at various times during approximately an eight-year period.
SEC Charges Coinbase & Binance
The SEC has filed charges against Coinbase, accusing the cryptocurrency exchange of operating as an unregistered securities exchange, broker, and clearing agency. The SEC alleges that Coinbase’s actions, including the unregistered sale of its crypto asset staking program, deprived investors of essential protections while generating significant unlawful profits. Similarly, Binance Holdings, the world’s largest crypto asset trading platform, and its founder face SEC charges for engaging in unregistered offerings and combining various market functions without proper registration, highlighting a pattern of deceit, conflicts of interest, and risk to customers and investors.
SEC Charges Bittrex
The SEC has charged Bittrex and its former CEO for operating as an unregistered exchange, broker, and clearing agency, and failing to register as a national securities exchange alleging that Bittrex earned over $1.3 billion in revenue from transaction fees without meeting the necessary regulatory requirements. The SEC’s charge alleges that Bittrex evaded registration and advised crypto asset issuers to do the same while combining multiple market intermediary functions to maximize profits.
SEBI Fines Various Entities
SEBI, the Securities and Exchange Board of India (SEBI), issued an interim restraining order and fined 135 entities the equivalent of $15.36 million dollars for market manipulation. The entities manipulated shares of five listed companies by trading among themselves and then sent bulk messages by text and via websites driving the stock prices up. SEBI also cautioned the general public on “fraudulent activities being carried out through SMSs, various websites, Social Media Like Telegram, Instagram, YouTube etc.”
Featured Content
The Vote Is In: The EU’s MiCA Framework Becomes Official
Monitoring Market Abuse in Crypto – What Lessons Can We Learn from Existing Surveillance Best Practices
TECH TUESDAY: Crypto Surveillance in Focus
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