Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Category Archives: Regtech, Compliance, Governance
CFPB’s New BNPL Rule for Fintechs and Financial Institutions
BNPL | May 28, 2024
Image: Unsplash
What CFPB's New BNPL Rules Mean for Fintechs and Financial Institutions
Buy Now, Pay Later (BNPL) credit services have grown at a forceful pace in recent years and are pushing regulators to rewrite the consumer lending playbook. These services have made it possible for customers to make large purchases using installment payments instead of paying the full bill in one go. Recognizing this shift, effective July 22, 2024 the Consumer Financial Protection Bureau (CFPB) has issued an interpretive rule to subject BNPL providers to the same existing regulatory framework binding traditional credit card issuers. The move is aimed at increasing consumer protection with BNPL transactions and to ensure fair lending within the growing sector. Here's a look at what's changing and what it means for fintechs and financial institutions. See: press release
Background and Rationale
Over the last couple of years, BNPL services—led by companies such as Afterpay, Klarna, and Affirm—have grown explosively, giving consumers easy access to splitting their purchases into smaller chunks, often interest-free. Key growth drivers have been the service's attractiveness relative to traditional credit, ease of onboarding, and ease of use. The speedy scaling of these companies has been met with growing concerns over consumer protection and financial literacy.
New Definition of Card Issuers
BNPL providers are now defined as "card issuers" under Regulation Z. Similar regulatory requirements for card issuers (credit card companies) are now required for BNPL providers, which includes consumer safeguards:
See: Experian to Include Apple’s BNPL Data in Credit Reports
- Required dispute settlement, such as a time-bound investigation and resolution
- Streamlined refund process is made available in case the product is returned
- Periodic detailed billing statements showing all the fees and charges
- BNPL providers are generally exempt from subpart G of Regulation Z. Several part G topics exist in the CFPB rule, such as certain penalty fee limits and the ability-to-repay requirements
Implications and Compliance
This will be an industry-wide change, in which many BNPL providers (especially smaller ones) will have to make a complete overhaul of their operations. While large providers may already embrace some of these practices, the baseline standards will be applicable to everyone with the new rule. The latter might level the playing field (with traditional card issuers) but also contribute to additional costs in terms of compliance and regulatory oversight.
The rule will benefit consumers in many ways. They are expanded protections that ensure consumers can dispute charges and obtain refunds with less fear of financial injury or inconvenience. Requiring more transparent billing should also make it easier for consumers to understand the terms of their BNPL agreements, and therefore make more informed financial decisions. Overall, the proposed changes will make for a safer and clear lending environment for BNPL users.
See: Klarna’s Meteoric Rise in the Canadian Financial Ecosystem
The best way to comply with the new regulation is to review current practices and check their relevancy with the new regulatory requirements. The customer service and dispute resolution teams must be adequately trained to deal with complaints in an appropriate manner. This amounts to the building of sound billing arrangements, offering clear statements useful to the consumer. The BNPL player should engage legal and regulation experts to be updated on further developments or adjustments to the rule.
Outlook
The willingness of the CFPB to take in public comments and adjust the rule as the case might be is an indicator that the BNPL services will be anything but a changing regulatory environment. The new interpretive rule provides BNPL providers with the protections offered by Regulation Z and ensures that consumers benefit from similar rights and that potential risks are limited to those observed with other types of credit cards. For financial institutions and fintechs, this rule requires strategic adjustments and a long term commitment to compliance.
FAQ
What is Regulation Z?
Regulation Z, also known as the Truth in Lending Act (TILA), is a federal law enacted in 1968 to promote informed use of consumer credit by requiring disclosures about its terms and cost. It applies to various types of credit, including mortgages, credit cards, and other consumer loans.
See: 37% Globally to Use Local Payment Methods by 2028
How does the new CFPB rule impact BNPL providers?
It considers BNPL providers "card issuers" under Regulation Z and, therefore, when it becomes mandatory to comply with its consumer protection measures, including dispute resolution and the need to issue a detailed billing statement.
What are some of the consumer protections included in the new rule?
What comes to mind is the right to dispute charges, streamlined refund processes, and periodic billing statements with a disclosure of all fees and charges from BNPL loans.
What are the exceptions to the new BNPL rule?
In general, the rule exempts BNPL providers from subpart G of the Regulation Z, which provides for the limits on certain penalty fees and the ability-to-repay requirements.
How can fintech companies ensure compliance with the new rule?
See: Putting it Into Perspective: Buy Now, Pay Later and Consumer Debt
Fintech companies should vet their practices against the new regulatory requirements, invest in strong billing systems, and invest in training for their customer service departments while engaging with experts in the legal and regulatory field to keep them updated on any further development.
What is the future for BNPL regulation?
BNPL services are still evolving in regulation, and both the fintechs and traditional financial services institutions should remain proactive to these changes and keep on changing their strategies in order to comply and be ahead in the competition for responsible lending practices.
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, artificial intelligence, 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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Primer on Quebec’s New Data Portability Law
Data Privacy | May 27, 2024
Image: Freepik/rawpixel.com
This September, Quebec's Law 25 mandates data portability rights, impacting organizations handling Quebec residents' personal information
On September 2024, Quebec's Law 25—namely, An Act to Modernize Legislative Provisions as Regards the Protection of Personal Information—will begin, creating a sea change in data privacy regulation that governs all transactions of companies in Quebec. This law intends to increase individuals' control over their personal data and provide additional responsibilities for firms in terms of data processing, transparency, and security. With these looming changes, Law 25 is something a fintech firm must understand now to stay compliant in the future and to deter hefty fines. NCFAs industry partner, Gowling WLG has put together this handy guide called, 'The Right to Data Portability: Everything You Need to Know"
Overview
- Starting September 22, 2024, Quebec individuals will be able to request their computerized personal information in a structured, commonly used format (e.g., JSON, CSV, XML) see Right to data portability, which shall allow them to have their personal data transferred from one company to another. This requires a fintech firm to develop robust systems that enable the transfer of data seamlessly, without compromise to the security and integrity of the data. This affects organizations collecting, using, or disclosing personal information of Quebec residents.
See: The Formation of the Canadian Digital Regulators Forum and its Impact on the Digital Economy and Consumer Privacy
- Non-compliance with Law 25 can lead to severe fines, from $15,000 to $25,000,000 CAD, or up to 4% of the corporation's worldwide annual turnover, whichever is higher. That means failure to fully comply with the new regulations regarding operations for data protection can result in significant financial costs.
- Personal data may not be transmitted to a third country unless a mandatory Privacy Impact Assessment (PIA) has been carried out, the risks have been assessed, and remediation measures have been implemented. This is intended to prevent any risk of breach or misuse of that data.
- The law strengthens requirements for obtaining consent and shall be explicit, informed and collected separately from other stipulations of the general terms of use. Under these conditions, fintech companies must ensure that users are perfectly aware of how their data is going to be used and have the ability to withdraw consent at any time.
- Technological products and services should, by design, provide the highest privacy levels with an onus on the default privacy settings (in other words, 'privacy by default'. This way, it shall ensure that the data of the users is protected from the start and thus reduce any risks attributed to its collection and processing.
Takeaways for Fintech Companies
- Prepare now and ensure systems can export data in required formats
- Implement an efficient process and secure method for handling requests
- Educate and train staff on new requirements and procedures
See: 2023 Data Privacy in North America – Year in Review
- Continuously monitor compliance to avoid severe penalties
- Seek legal advice to fully understand and comply with the law
How Does Law 25 Compare with PIPEDA?
The following is an in-depth comparison of the similarities and differences between PIPEDA and Quebec's Law 25.
| Feature | Quebec's Law 25 | PIPEDA |
|---|---|---|
| Scope and Jurisdiction | Applies to organizations in Quebec and those doing business with Quebec residents, focusing on protecting residents' privacy regardless of business location. | Applies to private-sector organizations across Canada involved in commercial activities, focusing on national-level privacy protection. |
| Consent Requirements | Requires explicit, informed consent, separate from other terms of service, similar to GDPR standards. | Allows for either express or implied consent, depending on the sensitivity of the personal information being collected. |
| Data Portability | Introduces the right to data portability, allowing individuals to transfer their personal data between organizations starting September 22, 2024. | Does not explicitly provide for data portability rights. |
| Privacy by Default | Mandates the highest privacy settings enabled by default, ensuring maximum data protection from the outset. | Does not specifically mandate privacy by default settings. |
| Privacy Impact Assessments (PIAs) | Requires organizations to conduct PIAs before transferring personal data outside Quebec, similar to GDPR requirements. | Encourages PIAs but does not mandate them. |
| Penalties for Non-Compliance | Imposes fines ranging from $15,000 to $25,000,000 CAD, or up to 4% of the company's worldwide annual turnover. | Imposes fines up to $100,000 CAD for non-compliance. |
| Data Protection Officer (DPO) | Requires certain organizations to appoint a privacy officer responsible for compliance. | Does not require the appointment of a DPO, but recommends it for large organizations. |
| Right to Erasure | Introduces the right to erasure, allowing individuals to request deletion of their personal information. | Does not include a specific right to erasure, but individuals can request corrections to their personal information. |
| Private Right of Action | Empowers individuals to take legal action against businesses for privacy violations, allowing for collective actions. | Does not provide a broad private right of action. |
| Cross-Border Data Transfers | Requires PIAs to assess the equivalence of foreign data protection laws before transferring data outside Quebec. | Requires organizations to use contractual or other means to protect personal information when transferring it to a third party. |
What About A National Standard?
While Quebec's Law 25 is currently specific to the province of Quebec, there is growing momentum for similar privacy protections to be adopted across Canada.
See: Analysis: Does Bill C-27 Reflect Lessons Learned from Past Public Outcry? Data Sharing for Public Good
The federal Bill C-27, which includes provisions for a new Consumer Privacy Protection Act, signals an ongoing effort to enhance data privacy nationwide. If adopted, these regulations could harmonize with Quebec's stringent standards, setting a unified framework for data protection across the country.
Looking Ahead
For organizations operating in the fintech space, it is important to remain aware of the law and how it is evolving in order to ensure full compliance for the protection of the data of their users. This will raise consumer trust in the economy and yield a safer and more transparent digital environment.
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, artificial intelligence, 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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WEF Insights On Coordinating Global Crypto Regulation
Crypto Regulation | May 27, 2024
Image; Pathways to Regulation of Crypto Assets - A Global Approach (WEF)
World Economic Forum (WEF) Publishes Recommendations for Global Coordination in Regulating Crypto Assets
Regulating crypto assets that are continuously evolving at light speed is complex and coordination among international jurisdictions, national regulators, and industry participants is key. In this light, WEF 2023 report (34 page PDF) offers a comprehensive set of recommendations and insights for a harmonized approach to regulating crypto assets.
See: Canada’s Proposed Mutual Fund Crypto Regulations 2024
This article reviews the recommendations drawn from the report and compares them with the current approach for different regions.
1. Recommendations to International Bodies
International bodies have a role in setting the stage for a unified global approach on crypto regulation.
a. Promote a harmonized understanding of the taxonomy and classification
- Describe different features and risks across crypto-assets and associated activities. Promote technology-neutral principles in supporting cross-jurisdictional convergence.
- Example: World Custom Organization's Harmonized System provides a model of standardized classification to ensure consistency across international trade.
b. Set out best practices and baseline regulatory standards
- Definition of best practices for key functions: custody, transfer, and settlement. Definition of baseline standards, such as AML/KYC, Consumer Protection, Market Integrity.
- Example from other sector: IOSCO harnesses the collective power of the capital markets' regulators to create global standards for securities regulation, ensuring adherence and compliance with baseline requirements.
c. Encourage data portability of entities and data sharing
- Develop standards around data sharing and interoperability, to support passportability of data. Interoperability will ensure a global coordination and resolution of entities' risks.
See: Open Banking: Revolutionizing Financial Data Sharing
- Example from other sector: Supervisory Colleges establish cooperative and effective mechanisms in conducting consolidated supervision over a financial group that is active on a worldwide basis.
2. Recommendations for National and Regional Regulators
National and regional regulators should build a safe and sound environment for crypto assets. Key points are cross-segment coordination, regulatory certainty, and using technology to design regulation.
a. Coordination Across Sectors
- Increase collaboration between financial supervisors and law enforcement. Multi-regulator sandboxes for controlled testing in practice.
- Example: India's IoRS allows for financial product cross-regulatory testing in practice.
b. Regulatory Certainty
- Develop guidelines and frameworks for the regulation of crypto-asset ecosystems. Focus on centralized intermediations and existing financial institutions in the beginning.
See: SEC Enforcement Director Grewal On Crypto Regulation
- Examples: The internet protocols like HTTP and SMTP are unregulated but all the applications built on them, for example, e-commerce or fintech, are regulated under different frames.
c. Using Technology for Regulation by Design (RegTech)
- Adapt technologies for automated compliance and real-time risk alerts and tracking of change in the regulation. Support public-private partnerships on innovation and risk monitoring.
- Examples: India, through consent-by-design data protection, ensures neutrality and compliance with consent obligations.
3. Recommendations for the Crypto Industry
Some proactive steps that the industry will have to take in order to achieve global coordination and regulatory alignment are discussed in the WEF report. It also calls for standard setting, sharing best practices, and responsible innovation in technology.
a. Standard Setting
- Coordination on technical standards around aspects like governance, consumer protection, cybersecurity, and interoperability.
- Example: The payment card industry data security standard.
b. Sharing of Best Practices
- Develop best practices with regard to managing operational, market, and counterparty risks. Periodically review material risks to financial infrastructure and service providers.
See: CSA Updates on Value-Referenced Crypto Assets Regulation
- Example: The global FX code, developed together with central banks and market participants, is a set of principles for good practices in the FX market.
c. Responsible Technology Innovation
- Engage with policymakers to innovate responsibly, considering maturity of industry and impacts to environment, society and economy.
- Example: Banking industry in Hong Kong jointly produced the Treat Customers Fairly Charter with the Hong Kong Monetary Authority to promote strong consumer protection principles.
Overview of Crypto Regulations in Leading Countries in 2024
As of 2024, several countries are progressing their regulatory landscape for cryptocurrencies. These nations are setting benchmarks by implementing comprehensive regulatory frameworks that align closely with the World Economic Forum’s (WEF) recommendations for a global approach to crypto regulation. Here’s an overview at some of these countries (in no particular order).
European Union (EU)
Markets in Crypto Assets (MiCA) Regulation
- MiCA is the EU’s landmark regulatory framework, set to take effect in 2024. It aims to provide legal certainty and protect consumers while fostering innovation within the crypto sector.
- MiCA includes stringent requirements for crypto asset service providers (CASPs), such as authorization procedures, operational requirements, and transparency obligations. It also addresses the regulation of stablecoins, setting high standards for issuers to ensure financial stability and consumer protection.
See: Challenges in Global Crypto Regulations – Lessons from Dubai
- MiCA’s comprehensive approach, including cross-border regulatory standards and consumer protection measures, closely aligns with WEF’s call for harmonized global standards and robust regulatory frameworks.
United Kingdom
Phased Regulatory Approach
- The UK is implementing a new regulatory regime following extensive consultations in early 2024. The Financial Conduct Authority (FCA) oversees crypto activities, ensuring compliance with AML and CFT regulations.
- The UK’s framework includes registration requirements for crypto firms, stringent consumer protection measures, and specific regulations for stablecoins and crypto-derivatives.
- The UK’s phased approach and focus on creating a secure, transparent environment for crypto activities reflect the WEF’s recommendations for regulatory certainty and consumer protection.
United States
Regulatory Developments
- The US regulatory landscape remains complex due to the involvement of multiple agencies, including the SEC, CFTC, and FinCEN. Recent legislative efforts include the Fit21 Bill that was approved with bipartisan support and still needs to receive passage from the Senate and presidential blessing.
- The US approach involves significant enforcement actions and a focus on integrating stablecoins into the financial system. However, regulatory uncertainty persists due to jurisdictional overlaps and legislative challenges.
See: U.S. House passes FIT21 with Bipartisan Support
- While the US is making strides in certain areas, the fragmented approach and ongoing regulatory ambiguity highlight the need for more cohesive standards, as advocated by the WEF.
Canada
Comprehensive Regulatory Framework
- Canada has established a robust regulatory framework for crypto assets, with stringent requirements for trading platforms to register with the Canadian Securities Administrators (CSA).
- The framework emphasizes consumer protection, requiring platforms to segregate customer assets and comply with AML and KYC regulations. The introduction of Bitcoin and Ether ETFs and discussions on a central bank digital currency (CBDC) further indicate Canada’s proactive stance.
- Canada’s comprehensive and transparent regulatory environment aligns well with the WEF’s recommendations for regulatory certainty, consumer protection, and the use of technology for regulation by design.
United Arab Emirates (UAE)
Innovative Regulatory Environment
- Dubai, through the Virtual Assets Regulatory Authority (VARA), and Abu Dhabi have established themselves as leading crypto hubs with robust regulatory frameworks.
See: The Complexities of Auditing Digital Assets
- The UAE’s regulations cover a wide range of crypto activities, providing clarity and security for businesses and consumers. These regulations include stringent AML/CFT measures and a clear framework for licensing and supervision.
- The UAE’s proactive and detailed regulatory approach supports WEF’s vision of harmonized standards and effective cross-border cooperation.
Hong Kong
Retail Crypto Trading Services
- Hong Kong has implemented regulations that promote responsible innovation while ensuring high standards for retail crypto trading services. Hong Kong also recently approved both spot bitcoin and ethereum ETFs.
- The regulatory framework includes comprehensive requirements for licensing, consumer protection, and AML/CFT compliance.
- Hong Kong’s regulations align with WEF’s recommendations by providing regulatory certainty and fostering a secure environment for crypto activities.
Singapore
Retail Crypto Trading Services
- Singapore has developed an enabling framework in which retail crypto trading services should be offered in and which will promote innovation at the same time as protecting market integrity.
- Strong licensing requirements, significant consumer protection measures, and comprehensive compliance with AML/CFT.
See: SEC Approves 19b-4 Forms of First Batch Ethereum ETFs
- The regulations in Singapore are highly aligned with the WEF recommendations to underpin the importance of regulatory certainty for a safe and transparent crypto environment, shown through the clarity of the guidelines and active integration of the best international practices.
Which Country Best Aligns with the WEF's Recommendations?
Here is the table summarizing the alignment of various countries' crypto regulations with the World Economic Forum's recommendations. The alignment score is based on the extent to which each country's regulations incorporate elements of the WEF's recommendations, such as consumer protection, regulatory certainty, and the use of technology for regulation.
| Country/Region | Alignment with WEF Recommendations | Score | |
|---|---|---|---|
| European Union | Comprehensive regulatory framework, consumer protection, cross-border coordination, and use of technology for compliance. | 9/10 | |
| United Kingdom | Phased regulatory approach, strong consumer protection, and supportive of technological innovation. | 8/10 | |
| United States | Fragmented approach with ongoing regulatory uncertainty, significant enforcement actions, and legislative efforts. | 6/10 | |
| Canada | Robust framework, stringent consumer protection, and proactive stance on innovation and regulation. | 8/10 | |
| United Arab Emirates (UAE) | Detailed regulatory framework, cross-border coordination, and clear guidelines for licensing and operation. | 9/10 | |
| Hong Kong | Comprehensive regulations, focus on responsible innovation, and high standards for retail crypto trading services. | 9/10 | |
| Singapore | Strong regulatory framework, stringent consumer protection measures, and support for fintech innovation through regulatory sandbox. | 9/10 |
Conclusion
As the landscape of crypto asset regulation continues to evolve around the globe, it is crucial that international bodies, national regulators, and the industry itself work together to create a harmonized and robust framework by promoting consistent standards, sharing best practices, and fostering responsible innovation.
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, artificial intelligence, 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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EU Grants Final Approval of AI Act, Effective 2026
AI Regulation | May 24, 2024
Image: Freepik
The Council of the European Union greenlights the first Artificial Intelligence (AI Act) Regulation
The Artificial Intelligence Act (AI Act) was given final approval on May 21, 2024 by the Council of the European Union, possibly setting a new global standard for AI regulation. This regulation aims to protect the fundamental rights of the EU citizens while supporting innovation and the development of AI technologies. The Act exclusively applies under the EU legal framework with some exemptions for military, defence, and research applications.
Here's the timeline of events...
- The Act on the AI, proposed by the European Commission under the aegis of Thierry Breton, was submitted in April 2021
- On 8 December 2023, a provisional agreement between the co-legislators (the European Parliament and the Council) was reached
- On 21 May 2024, the EU Council concluded its deliberations on the AI Act
Risk-Based Approach in AI Regulation
The AI Act is based on a 'risk-based' approach and classifies AI systems in three groups, considering the potential harm they could cause to society.
See: Australia to Regulate High-Risk Artificial Intelligence
- If an AI System is determined to be a 'Limited Risk', limited transparency obligations will apply.
- If the AI System is categorized as 'High-Risk', it will be able to operate but under strict requirements and obligations.
- The AI system will be considered falling into one of the 'Prohibited AI Practices' if in other words, the practice will result in banning and the same is causing unacceptable risks, including cognitive-behavior manipulation, social scoring, predictive policing rooted in profiling, and systems that classify users based on race, religion, or sexual orientation using biometric data.
Governance and Enforcement
- AI Office representing the European Commission where the rules get applied
- A Scientific Panel of independent professionals who will provide enforcement support
- An AI Board to advise and assist the Commission and the Member States on the consistent application of the AI Act
- An Advisory Forum comprised of technical experts who will advise the AI Board and the Commission
Penalties for Non-Compliance
Fines for non-compliance will be either the maximum value of a percentage of the company's annual global turnover (for the previous financial year), or a predetermined amount, whichever is higher.
See: EU: MiCA, DORA, Open Finance Framework, and Digital Euro
Fines are meant to be a serious deterrent, especially for larger organizations. Smaller companies and startups will receive proportional fines and relatively to their financial capacity.
Next Steps
After the assent, the AI Act still needs to be signed by both the presidents of the European Parliament and Council, and to be published in the EU's Official Journal with the regulation taking effect twenty days after its publication in the journal and with implementation starting two years later in 2026, except for a few provisions. This is global regulatory milestone that will hopefully result in responsible AI development and innovation to the benefit of society worldwide.
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, artificial intelligence, 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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EU: MiCA, DORA, Open Finance Framework, and Digital Euro
Regulation | May 23, 2024
Image: Freepik
Key Digital Finance Legislation in the European Union
Digital finance in the EU refers to all financial services and instruments that rely on new Information and Communications Technology (ICT) from digital payment services and instruments to new market infrastructure for crypto assets using distributed ledger technologies. Below is an overview based on the European Parliament's briefing update on 'Digital Finance Legislation: Overview and State of Play". It is quite essential for the regulation and framework set upon by the EU to find a balance between innovation and digitization that will in turn provide an environment that is safe both for risk management and the consumers' protection.
2020 Digital Finance Package
Collectively, the digital finance regulations are called, "The 2020 package" and they are a foundational regulatory framework focusing on:
- Tackling market fragmentation
- Facilitating digital innovation
- Promoting a financial data space
- Addressing new digital finance challenges
See: EU Lawmakers Approve Historic AI Regulation Act
Overall, the package aims to improve market efficiency, strengthen consumer protection and support innovation by:
- Streamlining digital finance regulations
- Providing clear regulatory frameworks for digital finance innovations
- Providing a supportive regulatory environment, fostering new financial technologies
Four (4) Key Digital Finance Regulations
1. Markets in Crypto-assets Regulation (MiCA)
MiCA regulation is set out in such a way that it safeguards consumers and firms using crypto-assets and facilitates innovation. The regulation will secure a sound and transparent legal basis for crypto-assets market, harnessing the potential of innovation while ensuring financial stability.
The above regulation is going to achieve such factors:
- A clear and robust legal framework of DLT-based crypto-assets.
- Enhanced protections of consumers and investors' interests, and finally
- Ensuring market integrity and promoting innovation
Status: Enforcement since June 2023
Key Dates: Measures under Level 2 should be applicable by December 2024
2. Digital Operational Resilience Act (DORA)
DORA regulation is designed to ensure the financial sector is resilient to ICT-induced disruptions and cyber-attacks. It enhances operational resilience and cybersecurity in financial operations by requiring detailed documentation and management of risks.
DORA has the following objectives:
- Effective ICT operation
- Governance and control framework for ICT
- Effective third-party risk management
Status: Enforcement by January 2023
Key Dates: The law will be applicable by 17 January 2025
3. Open Finance Framework
This is a framing of infrastructures that allow for access to financial data. This will allow consumers and small and medium enterprises to share data securely with third-party service providers. The legislation gives consumers control and access to their financial data, thereby enabling innovation in competitive financial services.
See: Small Step Forward As Canada Publishs Straw-man Open Banking Framework
This framework has the following objectives:
- Access to data for businesses and consumers from institutions without any hindrance
- A visionary protection of data under GDPR
Status: The legislative proposal for the same was put forth in June 2021.
Key Dates: The process is at the state of being in the legislative process.
4. Digital Euro
Digital Euro is a project through which ECB seeks to acquire a form of the digital euro which they seek to supplement with what is already physical currency. This will pave the way for modernizing the EU payment infrastructure to allow secure and efficient digital transactions.
As per the ECB, Digital Euro would serve the following purposes:
- Reduce dependency on non-EU payment service providers
- Adapt to the growth in digital payment trends
- Strengthen strategic autonomy of the European Union in the financial sector
See: Open Banking: Revolutionizing Financial Data Sharing
Status: It has the same status—legislative proposals introduced in June 2021.
Key Dates: The adoption of the legislative mandates is pending.
Conclusion
EU digital finance legislation will be a foundational building block for a secure, innovative, and competitive financial ecosystem. The regulations will enhance market efficiency, ensure consumer protection, and foster technological advancements in the financial sector.
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, artificial intelligence, 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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Uniswap’s Ready For SEC Battle. Responds to Wells Notice
DeFi Legal Battle | May 23, 2024
Image: Uniswap labs
Uniswap Legal War with the SEC: A DeFi Test Case
Concurrent to the recent passing of the FIT21 bill by the U.S. House, the ongoing legal battle between Uniswap and the U.S. Securities and Exchange Commission (SEC) is a monumental test case for decentralized finance (DeFi) with regulatory implications and challenges facing open-source financial systems globally. The SEC has accused Uniswap of operating an unregistered securities exchange and claims that its UNI token constitutes an investment contract. On the other hand, Uniswap counters these allegations by emphasizing the decentralized nature of their protocol.
Uniswap argues that its software is autonomous, enabling peer-to-peer transactions without the need for intermediaries. This, they claim, exempts them from the definition of a securities exchange. Uniswap’s protocol has demonstrated remarkable efficiency and security, facilitating over $2 trillion in trading volume without significant security breaches. This achievement highlights the potential for DeFi platforms to provide efficient, secure, and transparent financial services, potentially surpassing the capabilities of traditional financial systems.
Legal Precedents and Weak SEC Case
Uniswap’s legal team, which includes former high-profile SEC officials, is focused on the perceived weaknesses in the SEC’s case. They argue that historical court decisions have often favored technological innovation over restrictive regulations. This precedent suggests that the courts may lean towards supporting Uniswap’s position, recognizing the transformative potential of decentralized technologies.
See: SEC Issues Wells Notice to Uniswap. Another Legal Showdown
Uniswap asserts on their most recent blog post 'the fight for DeFi continues' that the SEC accusations are weak:
"These assertions assume that value represented in a specific digital file format is a security – and that the SEC can unilaterally extend the definitions of exchanges, brokers and contracts to the point of meaninglessness. A token is a file format, like a PDF. The Protocol is a general purpose computer program that anyone can use and integrate, like TCP/IP. And the hundreds of thousands of users who received UNI tokens for their participation in the protocol’s early days received the token for free, with no contract, and without expectations of profit solely from the efforts of Uniswap Labs."
Response to SECs Wells Notice
Uniswap made several key arguments in their 43 page wells notice response defense against the SEC's allegations.
- Uniswap argued that their protocol is decentralized, autonomous software enabling peer-to-peer transactions without intermediaries, which means it does not fit the definition of a securities exchange.
- The UNI token is primarily a governance token that allows holders to vote on protocol changes, not an investment contract.
See: Avi Eisenberg Trial: DeFi’s Legal Boundaries Tested
- Uniswap Labs does not control or maintain the protocol, akin to how no single entity controls Bitcoin.
- Uniswap does not solicit users to engage in trading activities or provide investment advice.
- Uniswap does not take custody of user funds, which negates the claim of it being a clearing agency.
- Citing previous court decisions that favored technological innovation, Uniswap argued that their protocol does not meet the statutory definitions of an exchange, broker, or clearing agency under the SEC's current regulations.
- Uniswap asserted that the SEC lacks the congressional authority to regulate the protocol as an exchange under the major questions doctrine, which requires clear authorization from Congress for such significant regulatory actions.
- They claimed the SEC failed to provide fair notice that their conduct could be considered unlawful, as required under due process principles.
- Uniswap emphasized that an enforcement action would harm the public interest by stifling innovation, forcing companies offshore, and depriving U.S. investors of the benefits of decentralized finance.
- They highlighted the economic impact and the protocol’s efficiency and cost-saving benefits for users, arguing that these innovations should be encouraged rather than penalized.
These arguments collectively aim to demonstrate that Uniswap's operations are fundamentally different from traditional financial intermediaries and should not be subject to the same regulatory framework.
Impact of FIT21 on Uniswap vs. SEC Case
The recently passed Financial Innovation and Technology for the 21st Century Act (FIT21) does have implications for the Uniswap vs. SEC case. Here’s how it might impact the case.
See: SEC Issues Wells Notice to Robinhood Over Crypto
- The FIT21 Act includes establishing criteria to determine the level of decentralization for blockchain networks and clarifying that an asset delivered pursuant to an investment contract is not necessarily a security itself.
- There's also a provision for certifying the decentralization of blockchain networks, which involves public comments and SEC review. The act’s emphasis on decentralization might favor Uniswap's stance that their operations do not fit traditional definitions requiring SEC registration.
- Joint SEC and CFTC oversight could introduce a more balanced regulatory approach, potentially reducing the SEC’s unilateral enforcement power. Uniswap could benefit from this dual-agency oversight, leveraging CFTC’s more commodity-focused perspective on digital assets.
- Additionally, the Blockchain Regulatory Certainty Act (BRCA), provides legal certainty for non-custodial entities so developers and infrastructure providers that do not custody or control user funds, ensuring they are not considered money transmitters.
Conclusion
The Uniswap vs SEC battle is one for the ages that tests the application of traditional securities regulations to new and innovative technologies like DeFi. The crypto world is watching and the outcome along with the potential enactment of FIT21 will establish significant precedents for the future of DeFi regulation and influence compliance strategies globally.
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, artificial intelligence, 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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U.S. House passes FIT21 with Bipartisan Support
Crypto | May 23, 2024
Image: Pixabay
The U.S. House of Representatives has officially passed the Financial Innovation and Technology for the 21st Century Act (FIT21)
Now, crypto in America is one step closer to getting the bill that will regulate digital assets in the country. That passage of FIT21 with bipartisan support shows growing consensus of the need for clear regulatory frameworks that foster crypto innovation while protecting consumers.
Vote Stats
FIT21 passed with a notable majority with bipartisan collaboration:
- Total Votes in Favor: 279
- Democratic Support: 71 Democrats voted in favor
- Republican Support: 208 Republicans voted in favor
- Votes Against: 136, most by the Democrats due to some reservations that they hold about some of the bill's regulatory provisions
Key Features of the FIT21 Bill
- Remove the confusion between the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regarding which regulator is actually in charge. The current confusion leaves users vulnerable to fraud and stifles innovation in the sector.
See: Responsible Development of Digital Assets (Crypto): Decoding Biden’s Executive Order
- It ensures the appropriate consumer protections are in place to help prevent scenarios like the collapse of FTX, safeguarding customer funds.
- With a clear regulatory framework, it will make the U.S. more attractive for digital asset innovation and stop the exodus of talent and firms to other, more cryptocurrency-friendly, jurisdictions.
Next Steps
The passing of the FIT21 in the House is a significant milestone, but it is not the end of the road. It will now go to the Senate for further consideration. Meanwhile, President Joe Biden has earlier expressed doubts regarding the enactment of pro-crypto legislation, constituting a possible challenge.
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, artificial intelligence, 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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