Introduction
Financial Technology (‘FinTech’) is changing the way entities operate. From start-up and innovators to experienced incumbents to regulators, FinTech has developed into a major economic sector in its own right with countless bar-raising specialists seeking to entertain new market opportunities by offering customers cutting-edge product and services that are cost-effective, customized and accessible.
Financial services customers no longer need to rely on a handful of entities to satisfy their market needs and customers can choose whether to be serviced by traditional financial services firms or the newer entities, the mission statement of whom is to bridge the complexities of financial services with innovation, efficiency and above all, simplicity. Needless to say, the latter seem to be attracting more attention than the former, for reasons that may very well be rather obvious.
Read more
Revolut and N26, two ‘digital banking alternatives’, which really and truly are e-money institutions licensed and regulated in terms of the Directive 2009/110/EC, provide users a digital alternative to cash. They allow users to store monetary value electronically and to make cashless payments to third-party entities with digital representation of real money stored on specific apps. Statista, a portal engaged in statistics and studies based on data extracted from thousands of sources, predicts that by 2020, both companies will have a combined customer base of more than 14 million. The simplified yet efficient user interface employed by these companies with which financial services and technology are seamlessly integrated, is perhaps the driving force leading to such exponential growth in user base.
The development of distributed ledger technology and its adaptation to multitude use cases necessitated further regulatory development to provide legal certainty to a domain marred by suspicion as to its intentions. The Virtual Financial Assets act and the Innovative Technology Arrangements and Services Act along with a compendium of underlying regulations and rules issued by the Malta Financial Services Authority (MFSA) and the Malta Digital Innovation Authority (MDIA) provide ample guidance on the regulation of ‘virtual financial assets’ issued on blockchains and ‘innovative technology arrangements and services’. Whereas the former regulates cryptographic tokens not otherwise regulated by traditional financial services laws, the latter allows voluntary certification of certain innovative technology arrangements – which can be distributed ledgers, smart contracts or any other arrangement approved by the MDIA. Innovators now seek ways to offer benefits of distributed ledger technology, not least the elimination of central authorities to verify transactions, to lay persons through the creation of productive and visually pleasing interfaces.
The introduction of this regulatory framework was a step in the right direction in what the MFSA refers to as ‘supporting the financial services industry to harness opportunities presented by technological innovation’. To achieve this, the MFSA published a consultation document called ‘MFSA FinTech Strategy – Harnessing innovation through technology’ (the ‘Strategy’) which sets out the Authority’s vision ‘to establish Malta as an international FinTech hub which supports and enables financial services providers to infuse technology in product and service offerings to drive innovation’. The purpose of the Strategy is to enable key FinTech players, including but not limited to, start-ups and financial services incumbents, to develop innovative solutions or provide enhanced access to financial products. The Strategy is based on the successful implementation of various initiatives across six strategic pillars, namely regulations, ecosystem, architecture, international links, knowledge and security.
Following in the footsteps of the Malta Gaming Authority (MGA) that had successfully implemented a sandbox for the use of DLT and the acceptance of virtual currencies within the remote gaming sector, the MFSA is now proposing a ‘FinTech Regulatory Sandbox’ which would provide entities ‘the space to operate in a controlled but fully functional services environment in which innovative new products, services, business models and delivery mechanisms can be tested, monitored and enhanced’. Whilst rigorous regulatory requirements are laudable and encouraged to safeguard the integrity of the financial services sector and related areas such as DLT, it will certainly be exciting to see to what degree of flexibility innovators will be allowed to operate in the proposed FinTech sandbox environment without being dissuaded by overregulation. In this regard, it is noteworthy that the MFSA has recognized regulatory proportionality as a strategic priority especially in relation to start-ups and other smaller, less complex entities.
