In brief...
The regulatory agenda for FinTech in the EU is moving
forward at pace. Late in 2019, a broadly sourced
European expert group (ROFIEG) published a lengthy
report containing no less than 30 recommendations
to the European Commission on how to create a more
accommodating environment for technology-enabled
provision of financial services (FinTech) in the EU.
Shortly afterwards the European Commission published
a consultation document on an EU framework for
regulating markets in cryptoassets. These initiatives
have common ground as part of the development of a
Digital Finance Strategy for the EU, stemming from the
March 2018 European Commission Fintech Action Plan.
The FinTech action plan included the following
statements, clearly laying the groundwork for the
initiatives which are now emerging:
- The European Commission will set up an expert group
to assess…whether there are unjustified regulatory
obstacles to financial innovation in the financial
services regulatory framework; and
- The European Commission will continue monitoring
the developments of cryptoassets and Initial Coin
Offerings… and…based on the assessment of risks,
opportunities and the suitability of the applicable
regulatory framework, the Commission will assess
whether regulatory action at EU level is required.
Digital finance strategy and regulation at the
EU level are highly complex issues because
advances in technology are bringing what were
historically fragmented, separately regulated,
services, processes and systems onto single source
platforms. On the service-delivery side, this offers
abundant potential for service improvement,
efficiency, accessibility, flexibility and future
adaptation. However, the technology has outrun
the comparatively neolithic regulatory framework,
exposing gaps and inconsistencies which are likely
to further damage the competitiveness of the EU
in this area if not resolved effectively and soon.
In this article, we look at a few overarching themes that
are likely to be at the fore in FinTech strategy during
2020, followed by some of the opportunities, challenges
and features in the market that we predict will shape
behaviour from a European perspective.
Themes
Competitiveness is a very important driver –
the ROFIEG report, before getting to recommendations,
calls broadly for greater pro-active leadership in the
region. This is needed to recalibrate effective regulation
around celebrated “European” values such as data
protection and fair competition, whilst avoiding undue
barriers to innovation in financial services. With the
advancement of Asian and US markets in both digital
financial services provision and digital assets clearly on
their radar, big market players in the EU see the existing
regulatory stage in the region as a major barrier.
In many ways, this is more significant than it has ever
been before, because these services are truly global,
users are considerably more agnostic to the jurisdiction
of source and combined with the prospect of a global
currency, the threat of overwhelming international
competition is becoming ever more acute.
Conflict is the next obvious challenge – financial
services is a traditionally highly regulated sector.
Even more so in the post – financial crisis era where
echoes of “contagion”, “too big to fail”, “systemic risk”
and all the other lessons and warnings that arose in
2008 still reverberate today. Regulatory sensitivity
remains high – whilst on the one hand the financial crisis
contributed to the fertile conditions for major disruption
in the sector, it also generated the type of regulatory
reaction that is bound to result in barriers to entry and
an inability to transform at an appropriate pace.
The idea of integrating flashy new technology into large
bureaucratic institutions, many of whose traditional
processes are arguably self-serving and institutionally
protected, is clearly one that is full of contradictions.
No more keenly have these been felt than on the front
line of “fintech collaboration” which itself has given rise
to new business lines in trying to smooth the path to
change. Creating mutual understanding and proper
interoperability is a very long journey which institutional
players argue is currently hampered by unfit regulatory
frameworks and compliance requirements.
Bigger Ethical Picture – whilst it is clear that the
EU is focused on the detail of FinTech, and offering
better integrated regulation with a positive practical
impact, there are also opportunities and consequently
some challenges in the bigger ethical picture around
ownership and protection of data, for example,
and financial inclusion. Developing measures which
will promote the right behaviour and outcomes, in a
consistent way on these bigger ethical questions,
certainly needs to be part of the strategy. However, the
details remain very unclear – how, for instance, will it be
possible to bring together digital identity, with the right
mix of public information and personal data ownership,
across diverse topics such as FinTech, social media and
communications, healthcare and insurance? Within
FinTech itself, the fruits of financial inclusion appear
to be there for the taking, but in the bigger picture
a number of questions remain about whether these
“advancements” will ultimately serve to broaden the
gap between tech-enabled users and those at risk of
being left behind. The elderly are often mentioned in
this context, as well as others for whom continuously
evolving choice is actually limiting, as they are unable
to keep up and therefore end up transacting on less
favourable terms. The EU’s FinTech strategy, and any
regulation which will be forthcoming, needs to strike
a balance on these difficult “bigger picture” points.
Market predictions
Whilst these political and regulatory themes are
important in shaping the 2020 and beyond road map,
the markets themselves also clearly have a vital role to
play. It is clear that the digital assets sector will continue
to grow and develop through 2020, and it should
ultimately be assisted by the regulatory developments
we have touched on. So in this section, we look at the
shape which the digital assets sector is expected to
take and we have set out some key predictions for what
we think will be the biggest growth and focus areas
for 2020.
Regulated exchanges
We will see regulated exchanges in key jurisdictions
allowing market participants to trade digital securities.
We have seen a shift in attitude from regulators,
previously being able to regulate exchanges in
an e-money (or equivalent) context, but little else.
They were much more reluctant to consider application
for fully regulated securities exchanges. Indeed there
have been very few instances of fully regulated
exchanges which are able to trade digital securities
(security tokens) and certainly not in Europe. At the
time of writing, Singapore regulator (MAS) is one of
the few key jurisdictions in this sector which has granted
recognised market operator licenses to digital securities
exchanges, although these are primarily private
exchange trade services.
However, the market in Europe is bringing pressure to
bear – across the region, there are many exchanges
leading the way hoping to become the leading regulated
digital securities exchange both in private sector and
also from such leading jurisdictions such as the Swiss
SIX Digital Exchange (SDX), Gibraltar Stock Exchange,
Malta Stock Exchange and others. We note that in the
US, tZero in conjunction with Boston Stock Exchange
(BSTX) is looking to be the first fully compliant security
token exchange and as highlighted in the themes –
competitiveness is key in this sector. The timing here is
crucial, which is why we see this moving forward in the
coming year.
There is a clear need for such regulated securities
exchange to bring liquidity and maturity to this sector
so we think this is simply a case of when and 2020 looks
to be a promising year where the regulators and the
service providers will be aligned.
Central Bank Digital Currency (CBDC)
One of the leading world economies will issue its
own Central Bank Digital Currency (CBDC). China has
been very vocal about its plan to unveil its CBDC.
If it does that soon, it will become the first to do so,
however, there are other jurisdictions hot on its heels.
It is understood the digital currency would be fully
backed by central bank deposits from commercial
and institutional banks. There may be surprise front
runners or at least near competitors from Switzerland
whose national bank is said to be working closely with
SDX to launch digital tokens backed by central bank
currency in 2020, and Sweden whose e-Krona is already
undergoing preliminary tests to name a few. Drawing
in the themes, and why this will be important in Europe,
some of the ideas behind CBDCs pull together in the
bigger ethical picture with arguments, for example, that
fully digitalised currencies will lead to increased financial
inclusion. For a full discussion on CBDCs and why
they will be the currency of the future, see ConsenSys’
whitepaper ‘Everything You Need to Know About Central Bank Digital Currencies’ published earlier this year.
UK v EU Regulation – Equivalence, divergence and the Brexit impact
As the UK prepares for Brexit to come into effect
following the official departure from the European
Union on 31 January, regulators and government will
be looking to highlight and showcase the strength
of the UK economy in its own right. FinTech is a
natural focus, with London being a hub for this sector.
The Financial Conduct Authority (FCA) will look to
continue to drive forward its innovation agenda which
is largely seen as start-up friendly, in large part due to
its innovative Sandbox which has now been replicated
across various other jurisdictions. The FCA launched its
own cryptoassets consultation in 2019 and provided
guidance to market participants, largely delineating the
digital assets which sit within the regulatory perimeter
and those which fall outside the FCA ‘net’. The EC
cryptoassets consultation, discussed in the introduction
above, is likely to bear fruit in terms of regulatory
initiative towards the end of 2020, just when the UK will
be leaving the block. This is clearly a sensitive topic with
discussions already highlighting the political importance
of equivalence in standards, but given the timing and
the fact that London is a FinTech powerhouse in its own
right, we expect UK local initiatives to develop further as
we head into 2021.
Digital identity
In July 2019, the UK Government Department for Digital,
Culture, Media & Sport launched a call for evidence on
how the government could support development and
secure use of digital identifies fit for the UK’s growing
digital economy. It recognised that, despite various
technological advances and use of ‘digital identities’
by various service providers, there is still no clear and
consistent application of its use in a manner which
satisfies the need of consumers to have their personal
information adequately protected. The call for evidence
closed in September 2019 and the department is
current analysing the feedback received. It is anticipated
that a full report of findings will be published in 2020.
This coincides with both one of the overarching themes,
the importance of digital identity and data ownership
in the bigger ethical picture, and also with the market
trend towards development of regulated exchanges,
which will need to rely on digital identity services for
effective execution of online transactions. This will be
a key focus in the coming year.
On other topics, we also expect 2020 to be a year
of increased investment activity in FinTech – both by
way of increased investment quantum in later stage
companies and through FinTech M&A activity which
has already seen a big upward trend through the
first quarter. We expect that the regulatory position
of the stablecoin product will become much clearer
in the European market, it is likely to ultimately come
in for direct EU regulation as perceived gaps in the
existing rules are plugged (whether the UK will follow
a similar route here remains to be seen). Finally, we
expect decentralised finance (de-fi) to remain on the
agenda in the coming months, alongside the theme of
market integrity. In particular, as cryptocurrency trading
continues to mature alongside the development of more
regulated exchanges, the role of de-fi in generating
trading opportunities and liquidity will increase,
alongside the growth in importance of maintaining
ethical trading practices and integrity in the markets.