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Latvia central bank opens to fintech with ‘Innovation Hub’

The Bank of Latvia has been quietly stepping up its game in providing assistance to fintech projects while employing the latest emerging technologies internally….



The Bank of Latvia has been quietly stepping up its game in providing assistance to fintech projects while employing the latest emerging technologies internally.

Fintech innovations and emerging technologies have swept the world, causing global lawmakers to rush to understand and regulate them. 

While some countries like the United States and El Salvador have had a public relationship with adopting new technologies, others have quietly joined the game. Among these is Latvia, a small country located in the Baltics, neighboring Estonia and Lithuania.

Cointelegraph spoke with Marine Krasovska, the head of financial technology at Latvijas Banka (Bank of Latvia) — Latvia’s central bank — to better understand how regulators in the country are dealing with new technologies like cryptocurrencies and artificial intelligence (AI).

Unlike its neighbor Estonia, which was the first European country to provide clear regulations and guidelines for digital currencies, these assets remain unregulated in the Latvian landscape. The Latvian Personal Income Tax Act defines crypto as a capital asset subject to the general capital gains tax of 20%.

Back in 2020, one of the country’s financial regulators, the Financial and Capital Market Commission (FCMC), warned the public about crypto fraud — particularly given that in Latvia, crypto companies “operate in an infrastructure that is currently characterized by lower regulation than in the financial and capital markets.”

An upcoming hub of innovation 

Since early warnings from the FCMC, Latvia has not developed new cryptocurrency regulations. However, Krasovska explained that in the last five years, the central bank, which is the primary regulator in Latvia, has been operating its Innovation Hub.

Krasovska said participation by fintech companies is not mandatory; however, the bank advises it as a “first entry point” to the Latvian market. The central bank offers this service free of charge for international companies and those originating from Latvia.

Krasovka speaks at the Global Government Fintech Lab 2022 conference. Source: Global Government Fintech

“When businesses come to the Innovation Hub and begin to describe their business model, sometimes we start to understand what companies actually need and don’t need,” she said.

She added that it’s an opportunity for businesses to talk in person with regulators to understand the business licensing needed and get risks assessed.

“We always suggest for companies to bring a lawyer to disclose interpretation risks. Interpretation of legislation is a very high-level responsibility.” 

Within the Innovation Hub, the bank has also created a pre-licensing process. According to Krasovska, this was created to help fintech companies — particularly those dealing with digital assets — create a “package of documents” that they can receive feedback on regarding the quality. 

Related: Germany’s blockchain funding increases 3% amid market downturn: Report

“So when the official application goes in,” she said, “the license process will be focusing on the main ideas rather than the quality of the application. This new pre-licensing began last summer.”

“We want to see more innovation on the market. But we also want to see that the risks are managed in a proper way.”

Krasovska said that last year, the Innovation Hub had 72 consultations with around 40% of all participants from Latvia. She commented that the hub’s data reveals increased interest from companies in “crypto and electronic money institutions services.”

Adoption from the inside

Along with helping businesses thrive in the Latvian fintech landscape, Krasovska said that the Latvian central bank itself is adopting new technologies to streamline its processes from the inside.

This includes moving central bank data into the cloud and adopting AI technologies like OpenAI’s popular chatbot ChatGPT.

“We, as a central bank, will also start this year to integrate artificial intelligence and ChatGPT in our work. Not just not just trying to do some kind of studies as everyone is using it, but we’re starting to adapt it in terms of we have identified our needs.” 

She said the central bank created an internal lab two years ago, which began experimenting with different kinds of technological solutions. 

Related: European Banking Authority calls for early adoption of stablecoin standards

She highlighted ChatGPT feasibility studies the bank has conducted, which will help it summarize large quantities of documents, such as tax documents that she called “not structured information.”

Krasovska also said the bank employs AI to help with data direction projects and supervise code.

Synthetic data creation

When it comes to data, the fintech executive said the Bank of Latvia is spearheading a new project in relation to synthetic data.

She said that when newcomers or tech companies developing new solutions ask for a data set to train business models, it has nothing it can legally provide.

“This year and also next year, we will be working with the database ideas from which we can create this synthetic data that is like a synthetic lottery or something along those lines,” she said.

“Then companies can come and use these different types of data to understand how their tools work or don’t work before they scale the business and offer their solution to real customers.” 

For example, businesses may need access to a large transaction database to understand how related monitoring tools work, “so what we’re doing right now is working on this integrated database,” she said.

Latvia and the current state of crypto

Over the summer, a report from the Latvian central bank said that local investments in crypto assets had declined by 50% over the past year.

The report was based on findings from payment card usage, revealing that 4% of the population bought crypto assets in February 2023, compared to 8% in the same month of 2022.

When asked about the sentiment toward cryptocurrencies in Latvia, Krasovska pointed to the crypto market conditions in combination with slumping market trends globally: “Globally, the financial markets are the way they are right now, and of course, this is [excluding] the crypto [market].”

Magazine: Crypto lawyer Irina Heaver on death threats, lawsuit predictions: Hall of Flame

Aside from the rocky conditions for the crypto community brought on by the lingering bear market, regulatory difficulties in major markets have caused investor sentiment to become less optimistic.

However, Krasovska pointed toward the European Union’s adoption and implementation of the Markets in Crypto-Assets (MiCA) legislation as something the central bank can lean on.

“With the adoption of MiCA, we can ensure very high standards for financial services.”

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SEC initiates legal action against FTX’s auditor

The SEC alleges that Prager Metis, an accounting firm engaged by bankrupt crypto exchange FTX in 2021, committed hundreds of violations related to auditor…



The SEC alleges that Prager Metis, an accounting firm engaged by bankrupt crypto exchange FTX in 2021, committed hundreds of violations related to auditor independence.

The United States Securities and Exchange Commission (SEC) has commenced legal proceedings against an accounting firm that had provided services to cryptocurrency exchange FTX before its bankruptcy declaration.

According to a Sept. 29 statement, the SEC alleged that accounting firm Prager Metis provided auditing services to its clients without maintaining the necessary independence as it continued to offer accounting services. This practice is prohibited under the auditor independence framework.

Extract from the SEC's September 29 statement. Source: SEC

To prevent conflicts of interest, accounting and audit tasks must be kept clearly separate. However, the SEC claims that these entwined activities spanned over a period of approximately three years:

“As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”

While the statement doesn't explicitly mention FTX or any other clients, it does emphasize that there were allegedly "hundreds" of auditor independence violations throughout the three-year period.

Furthermore, a previous court filing pointed out that the FTX Group engaged Metis to audit FTX US and FTX at some point in 2021. Subsequently, FTX declared bankruptcy in November 2022. 

The filing alleged that since former FTX CEO Sam Bankman-Fried publicly announced previous FTX audit results, Metis should have recognized that its work would be used by FTX to bolster public trust.

Related: FTX founder’s plea for temporary release should be denied, prosecution says

Concerns were previously reported about the material presented in FTX audit reports.

On Jan. 25, current FTX CEO John J. Ray III told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”

Furthermore, Senators Elizabeth Warren and Ron Wyden raised concerns about Prager Metis' impartiality. They argued that it functioned as an advocate for the crypto industry.

Meanwhile, a law firm that provided services to FTX has come under scrutiny in recent times.

In a Sept. 21 court filing, plaintiffs allege that U.S. based law firm, Fenwick & West, should be held partially liable for FTX's collapse because it reportedly exceeded the norm when it came to its service offerings to the exchange.

However, Fenwick & West asserts that it cannot be held accountable for a client's misconduct as long as its actions remain within the bounds of the client's representation.

Magazine: Blockchain detectives: Mt. Gox collapse saw birth of Chainalysis

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DOJ readies witnesses in Bankman-Fried trial, highlights FTX asset management

The DOJ intends to highlight the experiences of retail and institutional clients who entrusted substantial assets to FTX.
The Department…



The DOJ intends to highlight the experiences of retail and institutional clients who entrusted substantial assets to FTX.

The Department of Justice (DOJ) has confirmed its intention to summon former FTX clients, investors and staff as witnesses in the upcoming trial involving Sam Bankman-Fried, the former FTX CEO.

The DOJ submitted a letter motion in limine on Sept. 30 describing the witnesses it intends to call concerning FTX’s treatment of customer assets.

The testimonies intend to provide perspectives on the interactions between the accused and the witnesses. It also aims to get the witnesses’ understanding of Bankman-Fried’s remarks and conduct, particularly regarding FTX’s asset management. The DOJ intends to highlight the experiences of retail and institutional clients who entrusted substantial assets to FTX, believing that the platform would safeguard them securely.

Court filing in the United States District Court for the Southern District of New York. Source: CourtListener

Furthermore, a situation has emerged concerning one of the DOJ’s witnesses, “FTX Customer-1,” who resides in Ukraine. Given the ongoing conflict in Ukraine, traveling to the U.S. to provide testimony is associated with difficulties. The DOJ has suggested using video conferencing as a viable alternative. However, Bankman-Fried’s defense has not yet approved this proposal.

Nonetheless, the legal team representing Bankman-Fried, led by lawyer Mark Cohen, has voiced concerns about the jury questions put forth by the DOJ. According to Bankman-Fried’s defense, these interrogations insinuate guilt on Bankman-Fried’s part, potentially undermining the principle of “innocent until proven guilty.“

Additionally, the defense contends that these inquiries may not effectively uncover the jurors’ inherent biases, especially related to their encounters with cryptocurrencies. Moreover, specific questions could inadvertently guide the jury’s perspective instead of eliciting authentic insights, possibly compromising the trial’s impartiality.

Related: Sam Bankman-Fried’s lawyer challenges US gov’t proposed jury questions

With the jury selection scheduled to start on Oct. 3, closely followed by the trial, the spotlight is firmly on this high-stakes legal confrontation. This case underscores not only its immediate consequences but also underscores the vital importance of transparent communication and unbiased questioning in upholding the principles of justice.

Magazine: Deposit risk: What do crypto exchanges really do with your money?

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Vitalik Buterin voices concerns over DAOs approving ETH staking pool operators

The Ethereum co-founder proposes a solution that could lower the likelihood of any individual liquid staking provider growing to a point where it poses…



The Ethereum co-founder proposes a solution that could lower the likelihood of any individual liquid staking provider growing to a point where it poses a systemic risk.

Vitalik Buterin, the co-founder of Ethereum, has expressed worries regarding decentralized autonomous organizations (DAOs) exerting a monopoly over the selection of node operators in liquidity staking pools.

In a September 30 blog post, Buterin issues a warning that as staking pools adopt the DAO approach for governance over node operators—who are ultimately responsible for the pool's funds—it can expose them to potential risks from malicious actors.

“With the DAO approach, if a single such staking token dominates, that leads to a single, potentially attackable governance gadget controlling a very large portion of all Ethereum validators.”

Buterin highlights the liquid staking provider Lido (LDO) as an example with a DAO that validates node operators. However, he emphasizes that relying on just one layer of protection may prove insufficient:

“To the credit of protocols like Lido, they have implemented safeguards against this, but one layer of defense may not be enough,” he noted.

ETH staked by category chart. Source: Vitalik Buterin

Meanwhile, he explains that Rocket Pool offers the opportunity for anyone to become a node operator by placing an 8 Ether (ETH) deposit, which, at the time of this publication, is equivalent to approximately $13,406.

However, he notes this comes with its risks. "The Rocket Pool approach allows attackers to 51% attack the network, and force users to pay most of the costs," he stated.

On the other hand, Buterin highlights that having a mechanism to ascertain who can act as the underlying node operators is an inevitable necessity:

"It can't be unrestricted, because then attackers would join and amplify their attacks with users' funds."

Related: Ethereum is about to get crushed by liquid staking tokens

Buterin further outlines that a possible approach to address this issue involves encouraging ecosystem participants to utilize a variety of liquid staking providers. 

He clarifies this would decrease the likelihood of any one provider becoming excessively large and posing a systemic risk.

“In the longer term, however, this is an unstable equilibrium, and there is peril in relying too much on moralistic pressure to solve problems," he stated.

Magazine: Are DAOs overhyped and unworkable? Lessons from the front lines

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