Study Says Regulations Key to Fintech Evolution, Weeks After New EU Directive

A recent study assessing the current European financial technology (Fintech) scene, including digital currencies and cryptocurrency exchange platforms, suggests that regulation plays a key role in the evolution of EU Fintech services.

On July 20, 2018, the European Parliament’s Policy Department for Economic, Scientific and Quality of Life Policies—as requested by the Committee on Economic and Monetary Affairs (ECON)—published a study tackling the “Competition issues in the Area of Financial Technology (FinTech).”

A Review of Regulations

The authors stated that financial regulations serve as one of the first-entry barriers for crypto-related services like exchanges and wallets. In addition, these regulations set the legal standards for these service providers. According to the study, operators in every market are divided on whether to ask for more or less regulatory policies.

However, the study noted, one thing in common between these groups of operators is the need for a stable legal framework in which they work on. The absence of one proves as one of the major competitive challenges in the Fintech industry.

The study explained:

“The conclusion that the initial response to these [competitive] challenges may lie in regulatory measures… is shared for a number of different services, such as banking/lending, wealth and asset management and insurance. Others, such as services related to digital currencies, are still in an even earlier stage where the need for regulation is being assessed.”

The authors wrote that regulatory policies imposed on market platforms and service providers aim at protecting the consumers from fraudulent schemes and risky financial moves. Nonetheless, regulations with excessive restrictions might obscure the advantages of Fintech services.

The study added:

“Regulatory burdens, however, can somehow blur the main benefits of this model… Therefore, it is necessary to find the right balance between regulation and innovation to help foster the development of marketplace lending services while protecting consumer rights and financial stability.”

The analysis, however, reflects only the opinion of the group of authors, and not the official position of the European Parliament.

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EU Directive to Lessen Crypto Anonymity

The aforementioned study came two weeks after the European Union imposed another regulation that will affect transactions involving digital currencies. On July 7, 2018, the Fifth Anti-Money Laundering Directive took effect across all EU member states, two years after the European Commission proposed for it.

The directive was proposed following the perception that crypto transactions are a way to transfer illegally obtained money without the fear of authorities tracing the deals. Transactions involving cryptos do not ask identity-related information, requiring at a minimum only the wallet and user keys.

The Fifth Anti-Money Laundering Directive now includes virtual currency exchange platforms into the current EU anti-money laundering and countering the financing of terrorism (AML/CFT) laws. These rules include stricter user identification requirements and the sharing of this information between exchanges and the local Financial Intelligence Units, among others.

Věra Jourová, Commissioner for Justice, Consumers and Gender Equality, said:

“This is another important step to strengthen the EU framework to combat financial crime and terrorist financing. The 5th Anti-Money laundering directive will make the fight against money laundering more efficient. We must close all loopholes: gaps in one Member State will have an impact on all others. I urge Member States to stay true to their commitment and update their national rules as soon as possible.”

The Directive mandated that the first report regarding the implementation of the newly enacted rules should include legislative proposals regarding a central database of crypto users and wallet addresses.

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