Q. National Bank of Georgia was planning to regulate crypto market in Georgia. What was done so far?
A. In September 2022, the Parliament of Georgia passed the amendments in several laws introducing legislative framework for Virtual Assets (VAs) and for Virtual Asset Service Providers (VASPs) which became effective on January 1, 2023. Among others, the amendments covered Organic Law of Georgia on the National Bank of Georgia and the Law of Georgia on Facilitating the Prevention of Money Laundering and the Financing of Terrorism. The drafting of the proposed amendments was based on the recommendations of the Financial Action Task Force (FATF) and practical experiences of other jurisdictions. The abovementioned changes are addressing the identified shortcomings from Moneyval report in respect to FATF Recommendation 15.
In accordance to the legislative framework, the National Bank of Georgia (NBG) has the authority to supervise VASPs that includes mandatory registration regime of VASPs as well as Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) supervision.
As a next stage, the work is in progress for the registration procedures for Virtual Asset Service Providers, which is on target to be formalised and be issued before 1 July 2023. Following the issuance of the registration procedures, the National Bank of Georgia will start exercising its supervision power over entities falling under Virtual Asset Service Providers. Once the draft is available, the registration procedures will be issued for consultation with the sector to ensure that their insights are considered before final issuances.
On long-term strategic perspective, National Bank of Georgia (NBG) will continue reviewing market experiences of other jurisdictions as well as will consider cross – border engagement with other regulators/supervisory bodies. This will ensure collaboration and coordination addressing regulatory and supervisory challenges of virtual asset ecosystem.
By regulating VASPs NBG aims to achieve two goals: first to ensure that AML/CFT risks are regulated in virtual assets in a same scrutiny as in traditional finance; and second to give legitimate VASPs stamp of approval on AML/CFT and allow them to integrate with traditional financial sector.
Q. Do you have data about Crypto turnover in Georgia?
A. The virtual asset sector is growing rapidly. The comprehensive information on the size of the Virtual Asset Sector will be available once the entities that operate in the market register with the National Bank of Georgia. However, from the limited sectoral risk research conducted on selected Virtual Asset Service Providers it was estimated that top two services were virtual asset transfer and virtual asset exchange.
Q. How Crypto payments can affect GEL?
A. In accordance to the Georgian legislation, GEL is the only payment method in Georgia, thus Virtual Asset is not recognized as a legal tender. This approach is in line with majority of the jurisdictions in order to safeguard monetary sovereignty and stability.
Q. What are the risks of unregulated Crypto trade in Georgia?
A. Primarily, we need to explain the objective of regulating the Virtual Asset ecosystem. Whilst innovative nature of the virtual asset ecosystem is offering number of opportunities, we should be mindful of the existing and emerging risks of the fast growing and highly volatile industry and address them accordingly. Introduction of the regulatory regime around Virtual Asset Ecosystem creates the environment that builds trust with stakeholders, demonstrates openness of the regulator to support legitimate innovative business models and shapes the perception of the investors. The existing regulatory model where we focus on AML/CFT supervision provides the regulatory veil to the Georgian registered VASPs to detect and/or prevent potential AML and Sanction risk exposures, which makes overall ecosystem safer.
Q. How the inflow of Russian immigrants affected Georgian banking sector?
A. Since the beginning of war in Ukraine, we have quite a large inflow of migrants. That causes a solid rise in foreign exchange deposits in the banking sector. Since the beginning of the war, nonresident’s deposits in foreign currency have increased by approximately 49%. Eventually it slowed down, to some extent, positive de-dollarization trend which was observed over the last several years. During the past one year deposit dollarization rate in the banking sector has only declined by 0.2 pp to 54.8%. However, residents’ deposits dollarization, in turn, has declined by 2.4 pp to 48.2%, which means residents continue switching to the domestic currency.
Profitability of banks has increased significantly. On one hand, due to low cost of FX funding, which they can deploy in relatively high yield accounts internationally. And on the other hand due to high volume of foreign exchange operations by the migrants.
Q. What are the current sanctions applied to Russian immigrants in Georgia? What is the volume of money they bring by cash from Russia?
A. The NBG took respective measures to enable implementation of financial sanctions and to eliminate the likelihood of sanctions’ breach/evasion in the Georgian financial sector. On 26th February of 2022 the financial sector in Georgia is obliged to comply with the financial sanctions imposed by the US, EU and UK. Since then NBG facilitates effective implementation of the financial sanctions against Russia and Belarus by prompt communication with FIs, addressing any unclear issues/questions related to the sanctions’ compliance. Written instructions related to Sanctions Compliance issued by the NBG are of mandatory nature and in case of non-compliance, the NBG may take relevant supervisory measures (including fines, etc.) against the FIs. The NBG requests additional monthly reports from commercial banks about customers connected to Russia with the aim to further analyze trends and the risks associated with these customers and transactions in order to deploy further supervisory measures. Besides above-mentioned, the NBG has established new unit which is responsible for elaboration of respective methodological guidelines for FIs on international sanctions’ compliance, as well as checking and supervision of the implementation of the sanctions’ regimes envisaged by the NBG instruction. The NBG and, in particular, its unit for the Supervision of implementation of International Sanctions closely cooperates with OFAC, OFSI and EU relevant bodies for receiving guidance on particular issues and resolving specific questions related to sanctions. Also, actions taken by the NBG were positively assessed by different International Organizations, including IMF Mission.
Q. Critics say Russian businesses may try to use Georgia for avoiding financial sanctions by sending crypto currency and selling it in Georgia. How do you manage these risks?
A. The NBG pays particular attention on checking compliance of the financial institutions with the requirements related to the international sanctions during the onsite inspections, by examining whether FIs implement appropriate tools for detecting designated persons and entities, and whether Banks have complete knowledge about the customer and customers transaction to make sure what is the purpose of the transaction and conduct risk appropriate preventive measures. In addition, the NBG collects information on the persons identified by financial institutions as suspicious related to virtual asset service provision, in order to share collected information with the financial sector and instruct them to pay particular attention on these persons. As mentioned above, the work is in progress for the registration procedures for Virtual Asset Service Providers, which is on target to be formalised and be issued before 1 July 2023. Following the issuance of the registration procedures, the National Bank of Georgia will start exercising its supervision power over entities falling under Virtual Asset Service Providers, including supervision of their compliance with Sanctions’ regimes.
Q. In November 2022, we witnessed the collapse of FTX crypto exchange. Few days before, FTX CEO was negotiating expansion of stock exchange activities with Georgian government. Later BINANCE CEO had meetings in Tbilisi with the government leaders and representatives of NBG and private banks. As the result, Binance opened office and signed memorandum with TBC Bank, but the public has limited information about what were discussed and how it affects the sector. Can you please provide details.
A. Based on the legislative changes, it was expected that various foreign companies would be interested in the Georgian market. We welcome the diversification of the Georgian market with legitimate and innovative business models and the growth of healthy competition that positively affects development of the sector. The National Bank of Georgia is aware that virtual asset market has high inherent risks and will act cautiously under its mandate in compliance with Georgian legislation. We as a regulator will continue to safeguard market integrity in the rapidly evolving virtual asset ecosystem.
Q. Some startups recently announced partnership with local retailers, offering payments by crypto. How NBG or the revenue service will track these financial operations?
A. We aim to have balanced regulatory approach in order to promote the innovative business models as well as to manage and to address the key risks. For illustration, as per the legislation a person who provides services related to virtual assets has to be registered with the National Bank of Georgia and one of the criteria is being considered (not formalized yet) is the business model assessment to ensure it is in compliance with the local regulatory framework, including restriction on virtual asset use as a legal tender. Moreover, in accordance to the Law of Georgia on Facilitating the Prevention of Money Laundering and the Financing of Terrorism, once registered VASPs are considered as obliged (accountable) entities who are liable to comply with full AML/CFT requirements. We continue to undertake an ongoing assessment of the emerging risks; and we will take necessary steps if they become necessary.
Q. In the past Georgia was the attractive destination for global Banking industry, including Societe Generale, HSBC. Their presence in Georgia were important in terms of building credibility of the whole country as the investment destination. What NBG is doing for bringing foreign banks back to Georgia? or do we have the necessity of having foreign banks?
A. The National Bank of Georgia is open and welcoming to foreign banks and that position is reflected in the legislation, as well. Specifically, “the Law on Commercial Bank Activities” defines “the foreign trusted bank” as a bank from a developed country that is highly rated by the competent credit rating agencies. According to the law, a foreign trusted bank, which is well-known and highly reputable bank with a high credit rating and multi-year experience in a financial sector, strong financial figures and high-level transparency, may be licensed according to a simplified procedure. For the purposes, the NBG could define the simplified list of documents, on an individual basis, those should be submitted by the foreign trusted bank as a license applicant.
Q. Please evaluate financial situation of Georgian banking sector.
A. As a result of financial stability policy implemented by the NBG, the financial sector remains resilient and continues smooth lending to the economy. As of February 2022, banks maintain healthy capital and liquidity indicators, while the non-performing loan ratio improved compared to the previous year and equaled to 1.9%. The resilience of banks’ asset quality was promoted by macroprudential measures directed towards the reduction of household indebtedness and credit dollarization. It should be noted that, similar to the previous year, banks started 2023 year with a solid profit (ROE around 25%), which was supported by the credit activity and small credit losses. Improved financial indicators allowed majority of banks to recover released capital buffers at the onset of the Covid-19 pandemic. Therefore, significant share of banks will be able to satisfy countercyclical capital buffer requirement, which was recently set at 1%, with internal resources, using existing profitability and capital buffers. Considering the risks coming from the current regional situation, the accumulation of capital buffers will help banks to mitigate risks and, in the periods of stress, it will promote smooth lending and fast economic recovery.
Q. What are the regulations for using AI in banking sector? Does it really help improve the sector?
A. One of areas where banks use AI are data-driven models used for business decision in lending, marketing, risk management. The benefit to use such models is both cost and time savings, efficiency, improving customer experience. The use of these models is governed by the NBG regulation, which creates framework of development, validation, and employment of these models. This regulation facilitates wider and more efficient use of models in the financial sector while reducing risks associated with complexity of AI models.
Q. How the acceptance of Georgia as the EU member can change the banking sector in Georgia? What is the difference between modern Georgian banking and European banking?
A. The acceptance of Georgia as the EU member can have a positive impact on the country’s banking sector, leading to increased investment, greater competition and innovation in the financial sector. One of the main differences between modern Georgian banking and European banking is the level of sophistication of the financial sector. While Georgian banks have made significant progress in recent years, European banks are generally more advanced in terms of product offerings. EU membership might attract European banks and other financial institutions to enter the market, facilitating adoption of more advanced financial technologies, improved customer service and lower costs for consumers.
Q. How the conflict in Ukraine affected the Georgian Banking Sector?
A. At the beginning of the war external risks have intensified. For developing countries, significant widening of current account deficits was expected. For small and open economies with high level of dollarization like Georgia the external vulnerability further accelerated as sovereign risk premium in the region spiked. In addition, faster than expected increases in monetary policy rates in developed countries, in part spurred by inflationary impact of the war, may also put a pressure on capital outflows from developing economies and, consequently, lead to local currency depreciations against hard currencies, threatening the asset quality and soundness of financial intermediaries. This was and remains the risk.
However, so far, it turned out that economic growth perspectives are not affected negatively for CCA countries, as Georgians living in Russian as well as Russians migrated from their country into Georgia, bringing their capital here, which on the one hand boosted aggregate demand in Georgia as well as appreciated our exchange rate. Due to Georgia’s geopolitical location, foreign demand has increased more than expected. Hence, a large influx of arrivals from Russia, Belarus and Ukraine, alongside a recovery of tourism sector and international mobility, has had an upward impact on economic activity.
In addition, due to the macroprudential and microprudential measures taken by the National Bank of Georgia before the pandemic and the financial stability policy implemented since the start of the pandemic and the Russia-Ukraine war, the financial sector remains resilient and continues smooth lending to the economy. The majority of banks have already recovered the capital buffers released during the pandemic and met the threats related to geopolitical tensions in the region with solid buffers. Direct sanctions were imposed only on one subsidiary of Russian bank and this problem was immediately resolved by selling parts of assets and liabilities to other banks. In addition, imposition of Liquidity Coverage (LCR) and Net Stable Funding (NSFR) ratios in pre-pandemic period promoted stability of banks’ funding and improved liquidity buffers. The financial sector’s readiness was further facilitated by the sustainability of banks’ assets’ quality, which was greatly supported by the macroprudential measures implemented in pre-crisis period to reduce household over-indebtedness and loan dollarization. Apart from that, in order to improve the borrowers’ creditworthiness, the National Bank updated certain requirements of the Responsible Lending Regulation this year. Namely, In order to ensure necessary buffers in response to interest rate hikes, commercial banks have been required to take into account 3 percentage point interest rate shock for floating rate loans when assessing borrower’s creditworthiness. In addition, to address risks stemming from dollarization for non-hedged borrowers, we decreased maximum maturity for mortgage loans in foreign currency down to 10 years. Moreover, to moderate the excessive growth in consumer credit, we tightened payment to income requirement and reduced maximum maturity of consumer loans temporarily from 4 to 3 years. Due to measures taken before the pandemic and also recently, the financial indicators have improved, which further indicates the healthiness of the country’s financial system. According to our assessment, which we published recently in our financial stability report, banking sector remains solvent even under severe risk scenario.
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