Enabling technologies continue to fuel innovation in fintech and financial services. But what are regulatory bodies doing to ensure safety for consumers and fair competition for businesses?
Here are some of the areas where regulators could make themselves felt by the fintech industry in 2024.
AI: From the EU’s AI Act to Executive Orders in the U.S.
Whether its the boardrooms of Silicon Valley or the halls of Congress, the call for regulating AI technology is only getting louder. As we enter 2024, the focus on AI-based regulations in the U.S. will come from the Executive Order signed by President Biden in October. This order, called the Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, builds on the administration’s Blueprint for an AI Bill of Rights from last year. The order lists eight guiding principles for the responsible development and use of AI – including the importance of U.S. leadership in this field as well as both support for American workers and protections for American consumers.
The order also set out a series of regulatory requirements that range from establishing AI safety and security standards to the importance of fostering innovation to concerns about human rights and equity. In their review of the executive order, Foley & Lardner analysts Millendorf, Allen, Moore, Barrett, and Zhang note that while it could set the stage for “potentially rigorous regulation,” the order also makes it clear that “the administration is not shy about their desire to promote competition.”
Meanwhile in Europe, we soon will have the chance to see the implementation of the European Union’s enactment of the AI Act. Unlike policy in the U.S., the EU’s AI Act is set to become law early next year. The AI Act comes two years after the EU first proposed a regulatory framework for AI and will mandate new restrictions on the use of the technology. This will include greater transparency on how data is used. The Act also categorizes AI technologies in terms of risk, recognizing everything from “unacceptable risk” systems that involve cognitive behavioral manipulation or social scoring, to limited risk systems such as image generating or manipulating technologies.
There has been some criticism of the EU’s AI Act – for example, French President Emmanuel Macron expressed concern that the legislation could stifle innovation. But with final details hammered out this week, a new comprehensive framework for regulating artificial intelligence will be among the first big technology headlines of the new year.
Buy Now, Pay Later, Regulate Someday?
According to research from Lafferty, the international Buy Now, Pay Later market will top $532 billion in 2024. And observers of the Buy Now, Pay Later phenomenon – supporters and critics – have known for some time that tougher regulations were coming to the industry. The only question was when.
Is the answer, “next year”? In the U.S., the Consumer Financial Protection Bureau (CFPB) has been studying the BNPL industry since at least late 2021. As such, the CFPB has recognized a number of key benefits BNPL provides relative to traditional credit products, especially with regard to the absence of interest payments, ease of access, and simple repayment structure. At the same time, the agency has also acknowledged a number of potential issues: discrete consumer harms, data harvesting, and overextension.
At this point, much of the CFPB’s impact on BNPL has been minimal. And while some observers believe that regulation is inevitable, few see signs of any specific imminent changes to law or policy with regard to BNPL in the U.S. There has some concern at the state level, with state attorneys general voicing consumer protection warnings. But at this point, “study and recommend” seems to be the approach the agency is taking toward BNPL for the immediate future.
Unsurprisingly, the EU is significantly farther down the path toward regulating BNPL than the U.S. is. In September, policymakers revised their Consumer Credit Directive (CCD) which updated rules for consumer credit and roped in Buy Now Pay Later products for the first time. With regards to BNPL, the revised directive specifies the circumstances under which a given BNPL service falls under the CCD. It also mandates that those BNPL services that are within the scope of the CCD be “subject to license requirements and certain regulations regarding responsible lending.” The new stipulations in the CCD must be implemented into member state national law by the fall of 2025.
Will the Regulators Curtail Crypto’s Comeback?
The price of Bitcoin is up more than 148% year-to-date. Ethereum is up more than 90%. Even the lowly Dogecoin has gained more than 35% from the start of the year through mid-December. After a slow start, 2023 is turning out to be a great year for cryptocurrency asset prices.
So will the regulators show up to take away the punch bowl?
Once again, the EU is the first mover when it comes to major regulation of enabling technologies in fintech. Next year, the EU will implement the Markets in Crypto Assets regulation – also known as MiCA or MiCAR. The first instance of a regulatory body establishing a comprehensive set of regulations for cryptocurrencies, MiCA was established in June. The regulations set new rules for stablecoins, including e-money tokens; require authorization for certain types of services provided by companies deemed crypto-asset-service providers; and introduce new rules to prevent market abuse via unlawful disclosure, insider trading or other activities “that are likely to lead to disruption or manipulation of crypto-assets.”
In the U.S., 2023 seemed like the year when regulators were doing everything they could to make life miserable for the cryptocurrency business. But 2024 could bring better news for the industry in the form of rule changes like the one recently made by the Financial Account Standards Board (FASB). This rule change allows institutions to represent their crypto holdings at fair value beginning late in 2024. Under current accounting rules, cryptocurrencies suffer from something called impairment.
This occurs because of the imbalance between how cryptocurrencies are recorded when they lose value as opposed to when they regain value. According to one observer, TradeStation Head of Brokerage Solutions Anthony Rousseau, this change gives corporate treasurers a potential way to include cryptocurrencies like Bitcoin to their balance sheets as a reserve asset. And as we’ve seen with the emergence of crypto ETFs in 2023, institutional adoption of crypto is one of the key leading indicators for potentially greater adoption of crypto throughout society.