Traditional financial institutions face challenges integrating technology and struggling to meet customer demand. FinTech notices the need for change and, with its disruptive power, builds an ecosystem where people can effortlessly make the most use of their finances. With digital-first financial solutions like Siwssmoney, FinTech users are inspired to send, spend, and manage digital assets in a streamlined, global, and cost-effective way.
But with the evolution of technology, risks in the industry are starting to grow, and governments see an opposing threat to users’ finances and data. Governments have been keeping a close eye on FinTech since the introduction of cryptocurrencies, DeFi, and, most recently, AI. This article will cover all the latest regulatory updates and future frameworks that will impact the FinTech industry we know today and shape its prospective outlook.
What is FinTech Regulation?
FinTech regulations are the necessary measures in the form of laws and rules that governments impose on the usage and spread of financial technology.
Governments and institutions around the globe take action to measure how FinTech can improve the traditional finance sector, globalize financial access, and impose more cost-effective services. Furthermore, AI and Machine Learning, vital components in FinTech, can improve operations, reduce costs, and analyze large data sets, making financial technologies a practical mechanism to implement.
Apart from the advantages, governments also have the uneasy task of figuring out regulations to fight the growing risks in the industry. Financial fraud, data privacy, and potential job replacements by AI are concerns evolving alongside fintech innovation, and governments step in to safeguard user privacy and rights and fight financial crime.
Is Regulating the FinTech Industry Necessary?
FinTech provides services in global financial markets, exposing users to fraud and cybersecurity attacks; therefore, regulation is vital. Sensitive customer data is involved in FinTech products, and following strict security and privacy standards ensures data leakage prevention and allows for more secure money transfers. Moreover, criminals have already found loopholes and ways to violate government laws, indicating the need for tighter AML measures.
Recent Regulatory Updates for the Different FinTech Sectors
FinTech has come into the financial landscape in critical times to support the recovery of the struggling global economy. However, being a newly developed concept, unfavorable conditions, including inflation rate hikes, cybersecurity concerns, and uncertainties regarding the effects of fintech on the labor market, have subjected the industry to regulatory needs.
Governments are developing new laws and rules to assist FinTech services in addressing the concerns and uncertainties. Below, we have taken the main fintech sectors affected by regulations and presented the most recent updates worldwide:
Cryptocurrency and DeFi Regulations
The idea behind cryptocurrencies and defi is their decentralized nature, meaning they are designed to be unregulated by central authorities, raising questions about how challenges in the industry can be adequately addressed without taking the central component of the technology.
The inability to distinguish which asset class the crypto falls into has left the US economy and regulatory bodies like the SEC and the Federal Reserve wondering what measures to take. New rules are about to be introduced in the near future, as the White House’s Executive Order in 2022 showcased an example crypto framework in the US and projections for the financial industry and its evolution.
The European Union sheds more light on the future of cryptocurrencies and DeFi platforms, with The Markets in Crypto Assets Regulation (MiCA) framework about to be introduced in 2024. MiCA will outline the comprehensive set of rules under which European citizens can use cryptocurrencies and licenses and laws for service providers.
On the other hand, China, Saudi Arabia, and more than 15 other governments have taken a different approach and have prohibited the usage, trade, business-related activities, and mining of cryptocurrencies.
AI and Machine Learning Regulations
With the rapid development of language models like OpenAI’s ChatGPT, the demand for advanced AI and machine learning chipsets has skyrocketed. The disruptive power of AI has raised concerns worldwide, leaving people questioning whether AI will lead to job losses and even form dystopian beliefs about machines’ capability to replace humans.
Leaders in the tech space, including Elon Musk, recognize the growing problem and have called upon a pause or a moratorium period of up to 1 year on AI development.
The European Union pioneered implementing AI regulations with the EU AI Act. The comprehensive AI law recognizes the benefits of AI systems and machine learning but also considers safety, transparency, and traceability risks to defend human rights.
The US, China, Japan, and other leading economies recognize the need for legislation and have imposed rules in a way inspired by the AI Act, with the regulatory environment varying on national goals and values.
With governments forming different frameworks and rules, there is no distinct global approach toward AI regulation. The future remains uncertain as AI’s benefits and risks are being closely assessed.
AML and Cybersecurity Regulations
Anti-money laundering (AML) and Combating the financing of terrorism (CFT) are measures used to track the flow of money and distinguish harmful and illegal transactions from trusted ones. Financial Crimes Enforcement Network (FinCEN) in the US and Anti-Money Laundering Directives (AMLDs) in the EU are regulatory requirements updated regularly to fight financial crime.
Know Your Customer (KYC) is a benchmark for people registering for FinTech services, as it is a crucial step for identity verification and risk assessment.
Furthermore, The General Data Protection Act (GDPR) is the strictest set of legislation rules that protects European citizens’ privacy and personal data. The GDPR and systems impose obligations on companies that process customer data to securely handle the information and implement technical measures like 2FA to protect it.
Lastly, fintech services need to acquire various licenses like the Extended Banking License, Electronic Money Licences, and more, depending on the products and services they offer and the location in which they operate.
What Comes Next for FinTech?
The FinTech industry is in a volatile state, and service providers need to comply with the imposed regulations to provide quality solutions and fight associated risks. The stricter rules are not necessarily a challenge to FinTech; in fact, businesses can thrive in a more regulated environment, as with increased cybersecurity and data privacy, reduced financial fraud, and better knowledge around AI and ML, consumer trust will be fostered.
As governments are yet to work on developing a globalized approach to FinTech, uncertainties remain. Still, the undoubted benefits of financial technologies have bridged the gap to financial services for non-banking populations and delivered swift, connected, and cost-effective solutions to users, thus increasing demand and speeding up global FinTech adoption.
