Fintech, Cryptocurrency and Associated Challenges
Financial regulators across the globe have been facing the challenges posed by modern technological advancement and its impact on the financial services sector. Financial technology (“fintech”) and particularity the risks and complexities arising out of the surge in popularity and commensurate adoption of cryptocurrency technology, has given rise to unique legal and regulatory concerns on behalf of regulatory authorities. One of the exciting by-products of cryptocurrency technology is its seemingly boundless use cases. While this presents great opportunity, it brings with it a mass of difficulty in understanding on the part of industry participants and regulators alike, and poses distinct risks for both consumers and the integrity of the wider financial market.
Ireland and the Central Bank
With Ireland being an attractive financial services centre in Europe, the Central Bank of Ireland (the “Central Bank”) has very much been at the forefront of the fintech space in recent years. Many fintech firms have pinpointed Dublin as a location of choice to launch their often novel and innovative technology products and services throughout the wider EU Market.
There is a broad range of ways that modern fintech and cryptocurrency technology can be utilised to provide an array of different products and services. As such, regulators globally have been grappling with the challenge of quickly developing a distinct understanding of this complex market that has not traditionally been regulated in any real way until now. All the while tending to their ongoing day-to-day duties of supervising the vast ‘traditional’ financial market.
In short, when presented with a fintech or cryptocurrency product or service offering from a new market participant that is required to seek authorisation under EU or Irish regulation / legislation, the Central Bank must:
- understand the nature of the product and how the technology in the background provides or assists in providing the product / service;
- identify all risk factors and engage with market participants in order to seek clarification from them as to how they intend to mitigate these risks through appropriate controls; and
- determine, based on their experience as a financial regulator to traditional financial institutions, whether these controls are adequate to protect consumers, the financial market and any / all other potential stakeholders.
Progress with Crypto Regulation in Ireland
The Central Bank has come under (at times undue) criticism in recent months, during a time plagued with market uncertainty in the backdrop of a global pandemic. However, it is important to highlight that two of the world’s most recognisable firms in the Fintech space, Coinbase and Gemini, have recently sought and successfully acquired e-money institution licences in Ireland.
Additionally, virtual asset service provider (“VASP”) submissions have been progressing significantly in recent months, with comments of an expected nature being issued to prospective applicant firms, many of whom anticipate successfully acquiring registration approval from the regulator over the course of the upcoming summer months. When viewed in the wider EEA context, where we understand that quite a small number of virtual asset service provider registrations have actually been acquired by prospective applicants, the Central Bank is certainly in line with its European counterparts. Despite also dealing with an unprecedented number of applications from a large pool of Fintech firms domiciled in Ireland.
Finally, despite numerous warnings from the Central Bank in relation to the risks associated with unregulated cryptocurrencies and similar tokens, there has been progression towards more mainstream adoption. In a big moment for cryptocurrency investment in Ireland, the Central Bank confirmed in late 2021 that Irish Qualifying Investor Alternative Investment Funds can gain exposure to crypto assets, provided the fund manager can show that the associated risks can be managed effectively.
A Consistent Progression
While the Central Bank may have acted conservatively towards the developments and ongoing challenges associated with fintech and cryptocurrency technology, this is not to say that the progress has been significantly hindered and as we are seeing, progression has been consistent in recent years.