Regulation for Fintech and Crypto: Why Obtaining a License is Crucial

In recent years, the fintech and crypto industries have experienced explosive growth, offering new and innovative ways of conducting financial transactions. However, this rapid expansion has also raised concerns about risks and consumer protection, and probes questions whether regulation of these industries is needed.

This article will explore the importance of regulation for fintech and crypto, the recent issues in crypto, and what aspects of regulation would be good for the industry and what not, and finally why obtaining a license might soon be crucial. Additionally, it will discuss the Astana International Financial Centre (AIFC) as a good example of fintech regulation and why its approach is beneficial.

Recent Issues in the Crypto Industry

The crypto industry has recently faced several challenges, questioning the need for regulation to address risks and protect investors. One of the most significant issues is fraud, with investors losing millions of pounds to Ponzi schemes, fake exchanges, and scams. For example, in 2019, a Ponzi scheme in the UK called OneCoin duped investors of more than £4bn, and the scheme’s founder is facing charges of money laundering and fraud in the US. Another issue is the lack of security measures in some exchanges, which have resulted in hacking and loss of funds. In 2020, the Singapore-based KuCoin exchange was hacked, resulting in a loss of $280 million worth of digital assets.

Furthermore, the volatility of digital currencies has led to concerns about market manipulation, insider trading, and price manipulation. For example, in 2021, Elon Musk’s tweets about Bitcoin led to a sudden rise in its value, but soon after, he announced that Tesla would no longer accept Bitcoin as payment, causing its value to plummet. Such instances demonstrate the need for regulation to create stability and transparency in the market.

More recent crypto crashes saw the collapse of Terra, which began with the unpegging of its algorithmic stablecoin and dragged down the whole Terra ecosystem including its native token LUNA. Over the course of a week’s time in 2022, the collapse wiped out almost an estimated half-a-trillion USD from the cryptocurrency markets.

Another recent example was one of the leading crypto exchanges FTX and FTX.US, which crashed due to a lack of liquidity and total mismanagement of funds, followed by a large volume of withdrawals from rattled investors. The value of FTX’s native token FTT plummeted, taking other coins down with it including Ethereum and Bitcoin, which reached a two-year low as of Nov. 9. FTX has identified a deficit of $8.9 billion in customer funds that it can’t account for, the first time the bankrupt cryptocurrency exchange has pinned down how much money has gone missing.

Regulation to the Rescue?

Could regulation be the answer to the challenges faced by the crypto industry to establish clear guidelines and ensure the safety of investors? Effective regulation could provide legitimacy to the industry, reduce fraud and hacking, protect consumers, and promote innovation. There are examples, such as the Astana International Financial Centre (AIFC), whose regulatory approach allows for innovation through a regulatory sandbox test environment, where fintech firms can test and launch new products and services in a controlled environment. This approach allows fintech firms to develop and test new products and services without the risk of regulatory non-compliance. Additionally, the AIFC’s regulatory framework is risk-based, flexible, and proportionate, allowing for new developments and innovations in the sector.

Positive and Negative Aspects of Regulation

When considering the aspects of regulation that would be good for the industry, transparency, fair treatment for all regulated parties, and consumer protection are vital. Regulations should require full disclosure of risks and ensure that consumers understand the potential risks involved in, such as investing in digital currencies. Additionally, enforcement should ensure that businesses operating in the sector are licensed and regulated. This could help prevent fraud and create a level playing field for all players in the market. Licensing and regulation should also apply to crypto exchanges, wallets, and other service providers, as they play a crucial role in the industry’s operation.

Moreover, regulation could drive the increase of institutional adoption for digital currencies, enabling them to become even more mainstream. For example, in 2021, the US OCC (Office of the Comptroller of the Currency) granted national banks the authority to provide cryptocurrency custody services. Such regulatory clarity enables banks and other financial institutions to provide services to crypto businesses and investors, which could boost the industry’s legitimacy.

However, overly strict regulations could have negative consequences, such as stifling innovation and preventing new players from entering the market. Therefore, regulations should be proportionate, risk-based, and flexible enough to accommodate new developments and innovations in the sector. The regulatory framework should be designed to encourage innovation and foster competition, while still ensuring that the industry operates within the law.

Importance of Obtaining Licenses

Regulation in the fintech and especially in the crypto industry is likely to become more and more present and eventually mandatory. And when that happens and businesses must obtain a license, it will be too late, as the queues and unknown requirements could become too heavy to be able to comply. The UK FCA is a good example of this; back in 2020, the FCA mandated that all UK crypto businesses comply with its regulations by January 2021. The FCA warned that businesses that failed to obtain a license before the deadline would face enforcement action, including closure. The importance of obtaining a license cannot be overstated, as failure to do so can have significant consequences for a business’s operations and reputation.

Fintech License-as-a-Service

There are number of service providers that can help fintech and crypto firms in licensing matters. For example, ABAC.kz is a provider of regulatory compliance solutions that offers a range of services, including licensing and registration, compliance consulting, and risk assessment. ABAC.kz specializes in the fintech and crypto sectors, providing expert guidance and support to businesses seeking to comply with regulations. Its team of experienced professionals can help businesses navigate complex regulatory frameworks and obtain licenses in a timely and cost-effective manner. Their Fintech License-as-a-Service is a turnkey solution for any fintech firm to obtain a fully regulatory compliant license for their international business, without having to relocate any personnel to another country.

ABAC.kz’s advantages over other service providers include its deep understanding of the regulatory landscape in the fintech and crypto industries. The company’s experts have extensive experience in dealing with regulatory authorities and can provide valuable insights into regulatory requirements and best practices. Additionally, ABAC.kz offers a range of services tailored to the needs of its clients, ensuring that they receive customized solutions that meet their specific regulatory compliance needs.

Conclusion

In conclusion, the challenges faced by the fintech and crypto industry propose the question ‘do we need regulation to address risks and protect investors’. Good regulation can provide legitimacy to the industry, reduce fraud and hacking, protect consumers, and promote innovation. The Astana International Financial Centre (AIFC), as an example provides an excellent example of how fintech regulation can be beneficial for the industry. Its approach allows for innovation through a regulatory sandbox test environment, and its risk-based, flexible, and proportionate regulatory framework allows for new developments and innovations in the sector. Businesses in the industry must obtain licenses as soon as possible to avoid potential challenges in the future, and service providers like ABAC.kz can help them navigate complex regulatory frameworks and comply with regulations in a timely and cost-effective manner.