Co-Owner & CTO of software and product development company Geniusee - specializing in innovations and Fintech.
getty
The future of fintech undoubtedly looks promising.
The year 2021 has been remarkable for fintech companies, with a record amount of transactions in every major area—including the Americas, EMEA and Asia-Pacific. Now, in 2022, the worldwide outlook for fintech investment is very positive, with various subsectors well positioned to continue evolving and new ones projected to emerge and flourish.
While fintech offers many benefits, it also poses some risks. For example, fintech companies tend to be less regulated than traditional financial institutions. In addition, fintech firms may be more vulnerable to cyberattacks since they often hold consumers’ sensitive financial information.
The future of fintech looks promising. However, it also brings greater exposure to regulatory requirements, sanctions and legal actions. This article briefly reviews fintech regulatory issues that will help bring safety and soundness once resolved, helping the industry thrive even further.
The Main Fintech Legal Issues
There are several fintech legal and regulatory issues. Three of them pose the most significant risk:
1. Data Privacy
Data privacy is one of the most important legal issues in the fintech industry. Fintech companies collect and use large amounts of customer data. This raises concerns about how this data will be used and protected.
One of the most critical issues in developing financial technology is risk assessment and data breach prevention. When regulatory bodies uncover a data leak, they may be able to identify the perpetrator due to noncompliance with anti-data-leak regulations.
In countries that are members of the European Union, noncompliance with anti-data-leak financial technology regulations may result in hefty fines.
2. Money Laundering
Money laundering is a process whereby the proceeds of criminal activity are transformed into legitimate funds. Money laundering costs firms and governments more than $2 trillion per year.
This legal issue is particularly relevant for the regulation of the fintech industry because of the way fintech companies facilitate payments and transfers. Fintech companies are required to comply with anti-money laundering (AML) regulations. These require financial institutions to take measures to prevent and detect money laundering.
AML laws and programs for fintech regulation should include customer identification and screening, transaction monitoring and reporting of suspicious activity.
3. Cyberattacks
Financial institutions are a common target for cyberattacks.
Fintech companies hold large amounts of data. This makes them attractive targets for cybercriminals. Also, fintech firms may be less prepared to defend against cyberattacks than traditional financial firms.
All financial firms need to have robust cybersecurity programs in place to ensure proper protection. These programs should include data encryption, firewalls and intrusion detection systems.
After this brief introduction to fintech law and regulation, it’s time to focus on different categories of fintech projects and how they can be licensed.
Licensing Categories For Fintech Projects
Different types of fintech businesses need different licenses. The main categories of fintech licenses are:
Banking
A banking license is required for companies that offer banking services, such as deposits, withdrawals, loans and money transfers.
Online banks with only a virtual presence are becoming increasingly popular. These financial institutions must adhere to fintech regulatory compliance to get licensing.
The U.K.’s first online bank that has received official banking licensing is called Atom Bank. It is built on a mobile app and provides a full range of banking services, including savings, mortgages and payments.
Besides Atom Bank, other fintech companies, such as Revolut, are obtaining—or on their way to obtaining—banking licenses and becoming legitimate banks.
Payment Systems
Payment systems are used to process payments and transfers.
Thanks to fintech, people are able to shop from the comfort of their homes, pay their bills and send and receive direct deposits without visiting a bank physically.
Consumer payment services aren’t the only sort of fintech payment system. Payment back ends and infrastructures, which include payment processing providers, solutions for receiving electronic payments, point-of-sale terminals and online debit and credit card providers, are among the in-demand fintech products and services.
To become available to users worldwide, all payment systems must adhere to fintech regulations that will protect their users and provide safe and secure payments.
Licensing Of Stablecoins
Fintech has transformed the stock market for good. Cryptocurrencies are gaining popularity, especially stablecoins.
Stablecoins are a type of cryptocurrency that is pegged to another asset, such as the U.S. dollar, gold or oil. The main advantage of stablecoins is that they are not subject to the volatility of other cryptocurrencies. Due to their stability, stablecoins can be used for everyday transactions and payments.
Fintech lets users transmit and accept bitcoin money as well as have access to digital cryptocurrency markets. Different sorts of fintech have also made trading more accessible. Anyone with an internet connection may now try their luck and talents in trading. That was formerly reserved for experts. As a result, stock markets around the world will witness a rise in investment.
Licensing stablecoins is important for two reasons. First, it builds trust among users. Second, it allows stablecoins to be used in a wider range of applications, such as payments, remittances and trading.
Summary
Fintech has the ability to transform the way financial services are delivered completely. It has already disrupted the financial world and changed the way we bank, make payments and invest, and greater changes are yet to come.
Financial institutions should prepare for the future with the tools and technology needed to stay up with fintech regulation. This will help them be aware of the risk, cultivate a culture of compliance and invest in regulatory technology.
Fintech regulation is important to protect users and ensure the safety of payments. In order to provide secure services and protect their users, all fintech financial institutions must adhere to fintech laws and regulations. Only then can the full potential of fintech be realized.
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