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FSC gearing up for digital influx

Jamaicans are increasingly engaged in the trading of virtual assets, including cryptocurrencies, stablecoins and art in the form of non-fungible tokens, but local regulations are confined to old realities amid a world that is increasingly going digital.

There are signs that Jamaica’s financial overseers are awakening to the need for a more modern template for oversight based on concerns that inadequate policing of the online space could open the door to illicit activity, but they’re not doing so entirely of their own volition.

The Financial Services Commission, FSC, plans to hire drafters to pen regulations for virtual assets in a bid to allow financial entities to manage risk while plugging money laundering loopholes.

The financial watchdog, which monitors insurance companies, pension funds, and securities dealers, says the new regulations it is looking to draft would align with a global push to regulate these new asset classes as it began the effort to recruit consultant attorneys.

In a notice posted last Friday, the FSC said it wants to “mitigate the risks emerging from virtual assets and ensure that virtual assets service providers are regulated for anti-money laundering and counter-financing of terrorism and proliferation purposes”.

“Consequently, Jamaica is required to develop a legislative framework for the regulation and supervision of virtual assets and virtual asset service providers in keeping with the Financial Action Task Force’s requirements,” said the FSC in the recruitment notice. The Financial Action Task Force is the global money laundering and terrorist financing watchdog.

Neither the FSC nor the Jamaica Securities Dealers Association responded immediately to requests for comment.

The move to regulate virtual assets comes at a time when the volatility of the global cryptocurrency market has led to rising concern regarding the so-called ‘crypto winter’, due to the massive decline in values of virtual coins. The value of the most popular cypto among them, bitcoin, dropped back to 2017 levels when it traded at some US$21,000 on Tuesday.

Bitcoin traded at over US$68,000 in November 2021 but suffered from a crash similar to US equities. The crash was influenced by inflation which reduced the real value of assets, but also due to the structural risk arising from the closure of some exchanges and digital currencies, including terra and luna.

Within the universe of digital assets, Jamaica is one of a very few countries that has launched a digital currency as legal tender, which it has branded as JamDex and which is equivalent and convertible to cash but confined to transactions in Jamaica.

Additionally, the Jamaica Stock Exchange has been chomping at the bit to launch a platform for the trading of securitised tokens and has again said the service would likely be available by year end or thereabouts.

Studies show that digital assets are attractive to novice investors with limited disposable income but who want rapid gains. For instance, the US-based Pew Research Center indicated in a late 2021 study that roughly 43 per cent American males under 30 years have traded cryptocurrencies compared to 19 per cent for women of similar age.

But the local authorities are also concerned about criminals using cryptocurrencies to conduct and obscure illegal activity. There are also holders of cryptocurrency seeking to convert back to real assets.

“I met one guy recently,” said a realtor who asked not to be named due to client confidentiality.

The realtor said the prospective buyer wanted to use bitcoin as proof of assets to acquire a local property valued at over US$1 million.

The FSC indicated that it previously developed a policy paper on a proposed regulatory framework for virtual asset service providers, which was approved by the board of the FSC and submitted to the Ministry of Finance and the Public Service in September 2020. The finance ministry utilised this policy paper to prepare a Cabinet submission which the financial regulator said is now at the Attorney General’s Chambers for review and approval.

“In anticipation of the Cabinet’s approval of the proposed regulatory framework for virtual asset service providers and to address this FATF technical compliance deficiency, the FSC seeks to procure the services of a consultant to prepare drafting instructions for the required amendments to the relevant legislation,” the FSC notice stated.

Interested consultants have until Friday, July 29, to demonstrate that they have the required qualifications and relevant experience to perform the services.

The FSC in a four-page advisory titled ‘The Requirements for the Digital Asset Framework’ outlined general rules that should govern digital assets. The advisory was, however, pulled from its website with the remnants resurfacing under ‘cache’.

The advisory outlined that any issuer of a digital assets must register with the FSC. And that digital assets must meet the guidelines for issuers of securities.

Additionally, financial entities who intend to introduce a digital currency to the market are required to submit to the FSC a series of documents, including a registration form and a circular. The circular must include information on the currency or coin and cover 10 checkpoints outlined by the FSC.

“Securities dealers who introduce a currency will be required to publish no less than quarterly a report on the performance of the currencies,” the regulator said.

The FSC also reminded securities dealers to adhere to anti-money launder and ‘know your customer’ procedures when taking on new clients, including their true identity, financial situation, investment knowledge, risk tolerance, experience and objectives.

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