As we head full speed into 2022, the digital world, crypto-assets and fintech are set to dominate commercial spheres. This article by Freddie Delmotte trainee associate at international law firm Bird & Bird outlines some predictions of the biggest
fintech trends businesses should watch out for in 2022.
The past few years have seen major disruption, challenges and streamlining of the financial and tech worlds. The COVID-19 pandemic (the “Pandemic”) has no doubt accelerated global digital transformation and the need for us to be forward-thinking,
adaptive and innovative. Digital transformation in the financial services sector, spearheaded by fintech innovations, has added considerable value: from expanding the access to affordable financial services (especially in emerging markets) to increasing competition
in the sector for the benefit of consumers.
One of the emerging themes in 2022 will be establishing a balance between:
- developing new and proportionate regulation(s) to help promote fair competition between fintechs and,
- providing greater protection to customers and
- promoting innovation in the sector to help turbocharge economies in the post Pandemic world.
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.
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 the use of bitcoin, along with other crypto assets, is expected to grow.
A call to arms to more strongly regulate cryptocurrencies and crypto-assets 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, registration procedures have been established for crypto currency exchange services and wallets as well as 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 allow the obtaining of 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.
There is also the major concern around the possible influx of legislative change which lies in the risk of consumers underestimating the intrinsic value of blockchain-based tokens or, not understanding their use properly. There is also 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:
- the implementation of MiCA to create trust and upskill members in the crypto-space and
- 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. There is of course the undeniable
potential of NFTs, but also the legal concerns that they raise. 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.
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”, 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.
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. 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, there will be a 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. Although these products are attractive to 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. 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. 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. 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.