Linklaters have released a global fintech report “Year in Review 2020 and Year to Come 2021”. They have summarised key legal and regulatory developments in fintech over the past year, and have made 7 predictions for fintech, covering UK, US, France, Belgium, Spain, Sweden, Germany, Luxembourg, Italy, Mainland China, Japan, UAE, Hong Kong SAR, Singapore, Indonesia and Australia.
Fionnghuala Griggs, Global Co-head of fintech, said: “2021 promises to be another busy year for fintech. During 2020, we saw an increased focus on the value of fintech, and it is clearly a popular sector ripe for consolidation. Alongside that, there has been a major shift in the regulation of foreign direct investments. fintech may be borderless, but technology and data are now viewed as critical to the national interests of many jurisdictions, which means more scrutiny over fintech transactions. Finally, we can’t overlook the global focus on ESG – whilst fintechs need to manage these risks themselves, there is also an opportunity here for dynamic disruptors to innovate through new tech-based ESG offerings.”
Linklaters 2021 Predictions for fintech are:
1. The uneven fallout from Covid-19: The pandemic has accelerated digitalisation in some areas and exposed the need for it in others. Legacy systems and manual processes will be put under huge pressure to keep up and Covid-19 “fixes” and “workarounds” will be adapted and become BAU. The economic impact of the crisis will also drive both market and regulatory activity
2. Alternative payment models to battle it out but consumers will have final say: As regulators continue to promote a diverse payments landscape, a variety of payment models will be left to co-exist competitively with one another. In some areas, dominant payment systems may face increasing pressure from upcoming alternatives, such as digital wallet systems, interbank instant payment rails and so-called stablecoins. Ultimately consumer behaviour is likely, as ever, to drive change.
3. More R&D on CBDCs but few (if any) given the green light: Whilst mainland China has launched a pilot phase of its retail central bank digital currency, most central banks are continuing to consider the viability and desirability/necessity of issuing one. Research and development work is likely to accelerate next year, though decisions as to issuance will likely take more time. Meanwhile, some jurisdictions are investigating options for interbank CBDCs, which could progress more quickly.
4. Regulatory frameworks race to catch up with innovation: New technologies, including distributed ledger technology and artificial intelligence, continue to prompt questions as to the application and suitability of existing financial regulation. New business models and the entry of BigTech into the financial sector have also raised questions as to the adequacy of current frameworks. As regulators across the globe grapple to uphold the principle of “same activity, same risks, same rules”, we are likely to see more clarifications and amendments to regulation
5. There’s more to come on DeFi and CeFi: The growth of DeFi was a headline of 2020. Whilst regulatory initiatives in Europe have raised questions as to its future, we expect the market to continue to develop over the next year. At the same time, the use of distributed ledger and other technologies in centralised financial markets infrastructure will continue to accelerate, improving efficiencies in the mainstream markets.
6. Opportunities for cautious growth but heightened investor scrutiny: Given increasing digitalisation we expect continuing focus on fintech as a key vertical within the tech landscape. There may be opportunities to expand for those that identify new business models and innovative solutions that respond to the demands of a digitalised society. However, whilst opportunities to raise external investment may increase for some, parties will be mindful of the potential downsides of rapid expansion, particularly during an economic downturn. We also expect on-going scrutiny of potential for longer-term profit generation – and investor return – impacting investment decisions and growth plans.
7. Increasing regulation of tech and data: Regulators are increasingly concerned to ensure that the pivotal role that technology and data companies play for individuals and businesses does not lead to abusive behaviour or systemic risks to markets and essential supplies. In financial services, regulators around the world will continue to extend their influence over these companies either indirectly (via stricter technology risk management and operational resilience rules on financial institutions) or directly (such as recent EU and US proposals for direct enforcement powers against systemically important tech and social media companies).
Harry Eddis, Global Co-head of fintech: Next year should bring some long-awaited clarity as to how the UK will regulate fintech, post-Brexit. In particular, we’re awaiting the findings of the UK’s Fintech Strategic Review and Payments Landscape Review, as well as consultations on the regulation of cryptoassets and stablecoins. Generally, we can expect the UK to continue to welcome and support innovation and take a leading role in global initiatives.