5 Trends to Watch in Fintech Regulation

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Finance Magnates | Matthew Unger | Jun 20, 2020

regulatory tech fintech trends - 5 Trends to Watch in Fintech RegulationWhat will have the biggest impact?

During the last decade, financial technology has improved dramatically, moving from mainframe trading computers and COBOL to mobile banking and blockchains. Never before have we been at such a critical inflection point as money, contracts, and regulations are combined into almost infinitely scalable code. Remote operations and contactless procedures are becoming the new normal, those financial services providers who previously resisted digitization now find themselves in a race for survival.

As with any “gold rush”, this frenzy brings new opportunities for exploitation, fraud, theft, etc. One only has to review the Wild West scenarios that played out in the cryptocurrency sector to recognize the potential for fintech to be used to either create or extract value. While some made fortunes in the early crypto days, others lost a lot. Hotter than the cryptocurrency and ICO wave of 2015-2017, fintech platforms are growing faster than ever before.

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Within the realm of fintech exist neo-banks, challenger banks, incumbents, and disruptors, each with unique threats, opportunities, and unit economics. From a technology perspective, fintech today has the capacity to perform nearly all core operations – yet, few financial services providers have been able to fully digitalize the front office experience, much less mid and back office operations. For example, most institutions cannot open a new bank account for a new SPV of an existing client.

While incumbents, tech giants, and startups race towards 100% digital delivery of nearly all financial products and services. New technologies, such as blockchain powered digital assets, have received constant media coverage but still only account for less than 1% of the addressable market. Registered financial services providers need clear regulatory guidance in order to take advantage of the benefits of blockchain technology.

Beyond blockchain technology, we are at the forefront of major shifts in regulation on virtual assets, data governance, privacy, custody, exchange, payments, KYC, and AML. The “new normal” has captured the attention of regulators, law societies, and governments globally. Digital delivery is contactless delivery.

As new technology such as e-signatures, blockchain, artificial intelligence, and cloud computing are only now being accepted by regulators, law societies, and governments we are going to revolutionize what is possible for digital finance. On a global scale, regulations change constantly – however, these five trends are likely to have the biggest impact.

3. Virtual Assets Service Providers Join the FATF

Last year, the FATF published new guidance that included definitions of both virtual assets and virtual asset service providers (VASPs). Around the world, financial intelligence units (FIUs) – such as FinCEN in the USA – have local

updates of their interpretation of the FATF definitions with most coming into effect as of June 2020.

See:  FATF Travel Rule interview with iComply: Cryptocurrency is Meant to be Trustless, Not Anonymous

Combined with the “Travel Rule”, as well updates to payments and custodial regulations, VASPs that implement compliance by design into their platforms stand to earn billions. A recent analysis of Facebook’s Whatsapp payment service in Brazil estimated first year revenues of $8.7B, and $17B by year two.

No doubt, VASP regulation is a tool that Facebook will leverage to bring Libra to market. Currently operational VASPs, such as Binance now earn billions per quarter. With virtual asset regulation now in effect, more traditional financial service providers will be able to explore the use of virtual assets in their businesses.

2. Digital Reporting

Many new fintechs underestimate the cost of the regulatory burden in their business model. Whether it is filing securities registration or exemption forms, documenting and reporting suspicious activities, managing know your customer, or maintaining cybersecurity compliance – regulatory reporting has traditionally been an onerous and manual process.

Many regulators, such as FinTRAC in Canada, have recently rolled out enhanced digital reporting systems that support REST APIs and batch reporting. Government agencies and law societies are recognizing that physical documents and face to face meetings now present health risks, liability, and business continuity threats.

3. Increasing Pressure on Compliance in Communications

As regulators themselves upgrade their toolkits they are also better able to supervise their markets digitally. Regulators such as MAS in Singapore or BCSC in British Columbia are actively targeting businesses that offer their services digitally, without maintaining local licensing or reporting requirements.

See:  Singapore Poised to Allow Crypto Derivatives on Approved Venues

As more regulators enhance their capabilities beyond digital reporting, they are becoming more efficient and better able to focus their efforts. This not only reduces regulatory burden for financial services providers, it makes life a whole lot easier for their clients.

Technologies such as natural language processing, big data, machine learning, etc are able to go well beyond analyzing inbound data feeds and with greater digital adoption can monitor the market at scale. While it is still early for the “Suptech” sector, regulators are starting to be equipped with the tools that enable them to separate signals from the noise.

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NCFA Jan 2018 resize - 5 Trends to Watch in Fintech Regulation The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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share save 171 16 - 5 Trends to Watch in Fintech Regulation