CUBE RegNews:
11^th April

The US Department of the Treasury publishes first DeFi risk report        

The US Department of the Treasury has published the 2023 DeFi Illicit Finance Risk Assessment. The assessment considers risks associated with what are commonly called DeFi services.  

Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said: “Risk assessments play a foundational role in promoting understanding of the illicit finance risk environment and more effectively protecting the integrity of the U.S. financial system.

“Our assessment finds that illicit actors, including criminals, scammers, and North Korean cyber actors are using DeFi services in the process of laundering illicit funds. Capturing the potential benefits associated with DeFi services requires addressing these risks. The private sector should use the findings of this assessment to inform their own risk mitigation strategies and to take clear steps, in line with AML/CFT regulations and sanctions obligations, to prevent illicit actors from abusing DeFi services.” 

While there is currently no generally accepted definition of DeFi, the term broadly refers to virtual asset protocols and services that purport to allow some form of automated peer-to-peer transactions, often through use of self-executing code known as “smart contracts” based on blockchain technology. This term is frequently used loosely by the private sector, often for services that are not functionally decentralized. 

The report recommends governmental action across the following three areas: 

• strengthening US AML/CFT regulatory supervision 
• considering additional guidance for the private sector on DeFi services’ AML/CFT obligations 
• assessing enhancement to address any AML/CFT regulatory gaps related to DeFi services. 

Goldman Sachs fined $15 million for swap business violation  

The Commodity Futures Trading Commission (CFTC) has issued an order simultaneously filing and settling charges against Goldman Sachs & Co LLC (Goldman) for violations of the CFTC’s Business Conduct Standards applicable to swap dealers. Specifically, the CFTC found that Goldman failed to disclose dozens of pre-trade-mid-market marks (PTMMM), in violation of Regulation 23.431, and failed to communicate to clients in a fair and balanced manner based on principles of fair dealing and good faith, in violation of Regulation 23.433. 

The order states that in 2015 and 2016, Goldman transacted dozens of “same-day” equity index swaps with US-based clients. In a “same-day” equity index swap, the equity leg of the swap strikes on the “same day” as the other material terms of the swap are agreed upon, rather than — as is typical— the day after the date of agreement. The order finds that Goldman failed to disclose to clients the PTMMM of these swaps — often disclosing a PTMMM for a different swap (the analogous “T+1” swap) instead, thereby obscuring the value of the same-day swap. 

The order imposes a $15 million monetary penalty. 

The CFTF fine comes just a few days after FINRA also fined Goldman Sachs $3 million for mistakenly marking some of its stock orders as “long” instead of “short”, and for trade reporting violations. 

FCA issues fees consultation paper

The Financial Conduct Authority (FCA) has issued CP 23/7 FCA regulated fees and levies: rates proposals for 2023/24. 

The CP outlines the FCA’s proposal to increase its funding requirement to £684.2m, but there is a nod to the recent financial challenges: “We recognize that many businesses, including those we regulate, are facing cost pressures. We want to ensure our fees are proportionate. As a result, we propose freezing minimum and flat rate fees to ease the pressure on the smallest firms. We are also freezing our application fees this year.” 

The consultation period closes on May 11^th 2023.