Regulate, Innovate, Collaborate: FinTech Trends for 2022

One of the emerging themes in 2022 will be establishing a balance between:

1. developing new and proportionate regulation(s) to help promote fair competition between FinTechs and,
2. providing greater protection to customers and
3. promoting innovation in the sector to help turbocharge economies in the post Pandemic world.

As we start the new year our FinTech specialists across our global offices have made their predictions on the biggest FinTech trends to watch out for:

The regulatory perimeter of Crypto

With ‘new tech’ disrupting more traditional financial services models and establishing new, unregulated markets, much of 2022 will focus on the establishment of regulatory regimes to help bring some order. Increased regulation is a common theme across FinTech, particularly in the sphere of decentralised finance applications (“Defi”) and cryptocurrencies.

Currently, the Defi ecosystem is buzzing but there is no regulation which allows dubious propositions to be offered to crypto newbies. However, on 6 December 2021, the Bank for International Settlements, the umbrella body for central banks around the world, published its Quarterly Review highlighting the need for systematic regulation and the co-ordination of supervision of DeFi activities at an international level. Click here to read our previous alert.

Similarly, the cryptocurrency market (despite recent price falls) remains as popular as ever. A 2021 report by market intelligence platform Blockdata points out that the bitcoin network processed around $489 billion per quarter in 2021. Thanks to fundamental factors such as; the growth in the average amount per transaction, the increase in the price of bitcoin and, the growth in the number of transactions, it is clear that the use of bitcoin, along with other crypto assets, is expected to grow.

Our financial services regulatory partner Gavin Punia, London commented, a call to arms to regulate cryptocurrencies and crypto-assets more strongly has resulted in a tension between those who wish to regulate these markets and those who wish them to remain outside of any regulatory regime. Most significantly, the draft regulations on markets in crypto-assets (“MiCA”) is the first European-level legislative initiative aiming to introduce a harmonized and comprehensive framework for the issuance, application and provision of services in crypto-assets. The draft legislation provides a set of prescriptive rules that, once formally adopted, will shape the conduct of business in European markets in crypto-assets. The 168-page MiCA document focuses heavily on rules to regulate crypto-assets (not currently covered) such as stablecoins as well as crypto-asset service providers(“CASPs”). ‘MiCA is expected to be subject to extensive legislative debate and is unlikely to be finalised this year (the Commission has anticipated its implementation in 2024) but nevertheless, key actors in the crypto markets will be seeking to streamline their practices with the current proposals.

Across Europe, we have already seen some regulatory developments. In Spain Jose Luis Lorente Howell, head of the Finance & Financial Regulation team Madrid office, has seen the establishment of registration procedures for crypto currency exchange services and wallets and regulations that require prior approval of advertising for crypto-assets under the 5th Money Laundering Directive.

Germany is perhaps the forerunner in crypto regulation, with laws which allowi obtaining a license under the transition provisions of MiCA.

From a UK perspective, the outcome of the HM Treasury consultation on stablecoins and regulation of crypto is expected in early 2022. This, in conjunction with the Kalifa Review of UK FinTech, should lay the groundwork for a UK regime that provides a competitive edge over other leading FinTech hubs.

Gavin’s main concern around the possible influx of legislative change lies in the risk of consumers underestimating the intrinsic value of blockchain-based tokens or, not understanding their use properly. These concerns are reflected around our European offices. Dr Michael Jünemann, head of the German Finance & Financial Regulation team in Frankfurt and co-head of the global Finance & Financial Regulation group at Bird & Bird says: “there is a shortage of fit and proper personnel… from a regulatory perspective” which is slowing down the processes around DeFi. Regulation is likely to mandate the perimeters in which participants operate, resulting in sanctions for market participants for non-compliance. This may well result in growing tension between encouraging consumer engagement and innovative FinTech products and the increasing scrutiny of how these markets are regulated and marketed. As such, two key themes of the coming year will be:

1. the implementation of MiCA to create trust and upskill members in the crypto-space and
2. to balance the appetite for both traditional and contemporary financial models.

A focus on NFTs

If there was an award for the 2021 FinTech buzzword, “NFT” would certainly top the list. NFTs have captured the imagination of brands and consumers alike (from digital art to music downloads) and this will only increase in 2022. Lawyers across Bird & Bird offices see the undeniable potential of NFTs but also the legal concerns that they raise. Kuba Ruiz, senior counsel in the Commercial Group and founding member of Bird & Bird offices in Warsaw, warns that there is a need for greater diligence by both potential purchasers and brands who are looking to exploit these assets so that both are fully aware of the risks around their acquisition and use, and to ensure that commercially viable deals are made that appreciates the true value of the asset and protects fundamental rights such as IP.

Jonathan Emmanuel, partner in London’s Tech Transactions team focusing on FinTech, anticipates that the use of NFTs will be wide-reaching in 2022. In an increasingly digital world, spurred on by the development of immersive digital ecosystems such as the “metaverse”, Jonathan believes the demand for NFTs and “fungible” digital collectibles will soar as more organisations (especially in the sports, media and entertainment and gaming spaces) seek to exploit their content via NFTs and other blockchain-based tokens and make them available via marketplaces.

Rebecca O’Kelly-Gillard, also a partner in Bird & Bird’s London office, explains that an increase in NFT activity may also lead to increased litigation: with greater commercial viability comes greater regulatory scrutiny and a heightened risk for fraudulent activity, including misuse of third-party intellectual property (copyfraud). Balancing the desire for engaging with customers through exciting NFT ventures poses numerous regulatory, contractual, IP, consumer law and reputational issues for organisations to consider. Any resulting litigation will have to address complex jurisdictional issues and difficulties in identifying the ultimate infringers in an area rife with pseudonymity.

Open Banking

The traditional high street banking model has quickly become a thing of the past, especially given the closures in the height of the Covid-19 outbreak. The introduction of Payment Services Directive 2018 (“PSD2”) has undoubtedly helped to invigorate the payments space, leading to the development of new business models and new market entrants. Slawomir Szepietowski, managing partner of the Warsaw office who and head of the Financing & Financial Regulations practice in Poland, believes that FinTech follows e-commerce very naturally, and as such there is huge potential for FinTech in this sector.

Through the use of APIs, third-party access to banking data has allowed consumers to connect to a wide range of financial products and services while also regaining control over their financial well-being. “Banking as a Service”, allowing banks and PSPs to access cloud-based banking infrastructures so that they can build banking offerings is also gaining major traction.

Whilst a welcome development for both consumers and market providers, Jose Luis Lorente Howell believes there will be need for guidelines and warnings on how such services are incorporated into contracts, e-commerce and FinTech platforms. This is the case for other unregulated consumer finance markets, such as buy-now-pay-later as an alternative to traditional card payments. Whilst attractive to the younger generations or those wishing to manage or avoid debts, such models are still in their infancy and their true implications are yet to be known. Slawomir believes there will certainly be an impetus on strengthening the security of the user, preventing fraud and placing adequate data protection protocols in place. In a report issued in late 2021, UK Finance provided recommendations to assist with the development of financial products and services. The report emphasises a need for a multi-lateral industry framework and strict governance to avoid potential market fragmentation and to offer more competition in the market as customers have more choice about their payment methods.

Open Finance

In 2022 the continued roll out of open banking will pave the way for evolution into open finance. Open finance involves extending open banking-like data sharing and third-party access from just payment accounts to a wider range of financial sectors and products, such as savings accounts, pensions, and investments, and which will take a consumer’s entire financial footprint into account. Annette Printz Nielsen, partner and Danish Head of the Financial Services Group, recognises that open banking is not a new trend, but one that matured significantly in the last year. Growth in open finance start-ups and scale-ups, as well as increased investments from established market players will continue to escalate in 2022.

In Europe and the UK, the UK’s Financial Conduct Authority (the “FCA”) published a feedback statement following an open finance consultation in March 2021 which laid out the next steps for open finance in the UK and future legislation around Smart Data. Meanwhile the European Commission’s digital finance strategy has laid out plans for a legislative proposal on an open finance framework by mid-2022. As Christina Fleming, senior associate in our London Tech Transactions team, explains, the vision for open finance will see customers regain the benefits from data which they own and control, allowing them to consent to the sharing of this data with third parties and gain access to new and innovative products to manage their finances more easily and efficiently. It’s easy to see the appeal of having all your financial data consolidated in one place, giving you a clear picture of your financial health, pensions, savings and investments, and allowing you to switch between, or procure new products and services more easily. We could see Account Information Services go further to offer added advisory features such as liquidity management, with more tailored user insights and projections. It seems, therefore, that many of the movements in open finance are for the benefit of both companies and consumers.

Conclusion

Following two years of primarily crisis-led technological development, it is hoped that 2022 will see a new wave of innovation, regulation and diversification of financial and technological applications. There will be a continuation of cross-border e-commerce and mass digitisation that will push all market actors away from traditional models. As many FinTech innovations reach the phase of execution and mass adoption it is no surprise that 2022 will focus on an influx of regulatory regimes to help bring transparency to markets and foster a level playing field. It is expected that we will see clarification of current regimes, such as PSD2, the introduction of new regimes, such as MiCA, and perhaps even expansions on existing FinTech models as Open Banking paves the way for Open Finance. Whilst it is impossible to predict exactly what 2022 has in store for FinTech, it will no doubt be another year of innovation, collaboration and regulation.

Written by Freddie Delmotte, Trainee Solicitor in Bird & Bird’s Tech Transactions team, London.

Relevant contributors:

Brussels

Scott McInnes

Copenhagen

Annette Printz Nielsen

Frankfurt

Dr Michael Jünemann

London

Jonathan Emmanuel

Gavin Puina

Rebecca O’Kelly-Gillard

Christina Fleming

Freddie Delmotte

Madrid

Jose Luis Lorente Howell

Warsaw

Kuba Ruiz

Slawomir Szepietowski