Global Financial Regulations 2022

Although the United States is considered the most cybersecure country in the world, in recent years, high-profile attacks on SolarWinds, Colonial Pipeline and the federal government have exposed both the state’s vulnerabilities and the increasing sophistication of cybercrime. President Joe Biden and the first-ever Deputy National Security Advisor for Cyber and Emerging Technology Anne Neuberger have responded strongly, making cybersecurity a top national priority. In the wake of the ransomware attack on Colonial Pipeline, President Biden issued the Executive Order on Improving the Nation’s Cybersecurity, and he and Neuberger are launching a counter-ransomware task force. In August, the Federal Financial Institutions Examination Council (FFIEC) issued a guidance to financial institutions on authentication and access risk management principles and practices, pertaining to digital banking access. Cybersecurity is increasingly perceived as a matter of national security, especially as actors are often state-sponsored, and it is included in the US’s first-ever Anti-Money Laundering and Countering the Financing of Terrorism National Priorities. 

Although the United States has been progressive in fostering its digital economy, it has yet to institute a national data protection framework, a national digital identity infrastructure or an open banking system. States, including California, Colorado and Virginia, have enacted data protection laws, and a handful of other states are in the midst of legislation. The pandemic has also driven 37 states (and counting) to enact laws making remote online notarization (RON) permanent.

Canada has taken a divergent approach to innovation than has the United States. Its open banking system is expected to go live in January 2023, and the Retail Payments Activities Act, which received royal assent in June 2021, will help fintechs compete with traditional banks. The government is poised to launch a national digital identity for access to online government services. Canadian provinces have also charged ahead in implementing cutting-edge digitalization initiatives. Ontario plans to introduce Canada’s first provincial data authority and a trustworthy AI framework, and is preparing to launch its optional digital identity infrastructure. The eID-Me digital identity mobile application, first launched in Ontario in 2020, was introduced in Alberta, Manitoba and Nunavut.

Neither the United States nor Canada are planning to issue a CBDC anytime soon, but a July Bank of Canada paper stated that one was “probably necessary” to ensure a competitive digital economy. US Federal Reserve Chair Jerome Powell, also in July, noted that a CBDC could help to counter the rising influence of cryptocurrency. 

Latin America—the most hard-hit region in the world by the pandemic—is undergoing rapid digitalization and growth in fintech, but economic resilience has faltered. Alongside a weakened economy, political instability and deepening inequality will be steep challenges as the region seeks to recover and pursue development goals. This year, its governments have focused on digital transformation, financial inclusion and the development of fintech ecosystems. 

Brazil, Chile, Colombia and Mexico will be key players to watch in the fintech sphere. Colombia is set to be the third Latin American state to introduce open banking, after Brazil and Mexico. Brazil began its phased implementation of open banking in February, a process that is slated to finish in September 2022. At the time of this writing, Chile’s Financial Innovation Bill is working its way through the legislative process. If passed, it will create a framework for open banking and introduce regulations designed to foster competition and innovation in the financial services sector. Mexico continues to enact provisions of its 2018 Fintech Law, which seeks to foster the development of innovative companies. Brazil and Guatemala are investigating CBDC, and Colombia and Mexico are rolling out national digital ID systems. Fintech will be key in encouraging financial inclusion, a major obstacle to further socioeconomic development in Latin America. Financial inclusion in the region has stalled since 2011, but cheaper financial services and products and a more open regulatory environment could spur on competition and widen access to banking services. Still, weak institutions and digital infrastructure remain barriers to the growth of fintech.⁵

Europe is home to some of the world’s most cashless societies, stable economies and progressive regulatory environments, but stark intraregional differences persist. The COVID-19 economy had disparate effects across the region, which has allowed up-and-coming fintech hotspots in Northern Europe to more readily compete with established hotspots like London and Berlin. While Denmark, Norway and Sweden have been relatively unscathed by the pandemic, other countries—like Germany and the United Kingdom—have faced significant setbacks. Meanwhile, although Eastern Europe has not yet reached the smartphone penetration and cashless rates of Western Europe, Poland has become a major fintech player in Central and Eastern Europe. This evolving landscape will make Europe an interesting region to watch as it recovers from the pandemic, and this shake-up could help spur on further digital transformation in countries like Belgium and France, where it has begun to plateau. 

The European Commission has been particularly keen to spearhead—and regulate—digitalization. In June, the Commission issued its proposal for a European Digital Identity, which would enable member states to offer individuals and businesses digital wallets that can be linked with national digital identities and that will be interoperable across the bloc. The proposal aims to reduce fraud, promote trust in e-commerce and facilitate the access to services across member states. The European Union’s digitalization efforts are often geared towards driving further regional integration, especially amidst the rise of populist and nationalist parties. In July, the Commission unveiled a comprehensive AML/CFT legislative package, which would establish an EU-wide Authority for Anti-Money Laundering and promote a harmonized approach to AML/CFT across the EU. The package also includes a proposal to apply AML/CFT rules to cryptoasset service providers, which would dovetail with its proposed Regulation on Markets in Crypto-Assets (MiCA). MiCA, a component of the EU’s Digital Finance Strategy, is a framework to regulate cryptoassets and cryptoasset issuers across the Single Market.

The European Union’s regulatory approach is also remarkable in that it is human-centric and rights-based, which is reflected in proposals like the Artificial Intelligence Regulation and the Regulation on Markets in Crypto-Assets (MiCA). Both proposals straddle a fine balance between encouraging the development of disruptive technologies, while protecting consumers and mitigating risks. Although the regulations must go through a lengthy legislative process before they can be enacted, they will be sure to ignite similar standards across the globe. Just three years after the GDPR went into effect, countries have rushed to emulate it and align more closely with its standards.

As European Union member states seek to recover from the pandemic, they are also pursuing ambitious national digitalization agendas. The European Union’s EUR 672.5 billion (approximately USD$779.97 billion) Resilience and Recovery Fund, to be divvied up between the member states, will go towards national plans that must adhere to broad EU requirements. Member states’ plans must allocate at least a fifth of their stimulus package towards digitalization initiatives. Under President Emmanuel Macron, France has been particularly notable for making digital headway, though it still lags behind the rapidly digitalizing Finland, Sweden, Denmark and the Netherlands. This year, France is focused on multiple CBDC projects, the regulation of virtual assets, the launch of a national digital ID and the strengthening of its AML/CTF framework. 

As Europe’s digital economy strengthens, CBDCs will be a major area to watch. The central banks of the European Union, Belgium, France, Norway, Sweden, Switzerland and the United Kingdom are all investigating CBDCs.

Fintech is rapidly expanding in Israel and the Gulf Cooperation Council (GCC) states, including Bahrain, the Kingdom of Saudi Arabia, Qatar and the United Arab Emirates. Israel, nicknamed the “Startup Nation,” is home to the world’s most startups per capita,⁶ the second-highest research and development expenditure per GDP⁷ and over a dozen fintech unicorns.⁸ The central bank has completed a digital shekel pilot, the Ministry of Finance has called for the establishment of a fintech regulatory sandbox and a national artificial intelligence program is in the works. 

The wealthy and ambitious GCC states are similarly committed to fostering competitive and cutting-edge digital economies, especially as they attempt to promote growth in the non-oil sector. In February, the central bank of the United Arab Emirates partnered with the central banks of Hong Kong and Thailand, as well as the Digital Currency Institute of the People’s Bank of China, for a multiple CBDC project aimed at exploring the use of CBCDs in real-time cross-border transactions. The project comes on the heels of a November 2020 joint experiment between the Kingdom of Saudi Arabia and the United Arab Emirates, also focused on cross-border payments. The GCC states have some of the highest numbers of migrant workers proportionate to the population at large, and these workers would benefit from cheaper, faster and simpler remittance processes. 

Egypt is poised to make strides in digitalization, but political tension, continued reliance on oil and structural challenges like inequality remain obstacles to the development of an inclusive and modern digital economy. Still, regulators have already made progress in providing greater regulatory clarity for fintech, and digital payments are gaining in popularity. Digitalization in payments will be especially important in expanding access to financial services, as Egypt’s unbanked population stands at an astonishing 67%.⁹

Meanwhile, conflict-affected Libya and Iraq continue to grapple with political and economic instability; high poverty, inflation and food insecurity; and weak digital infrastructure. Digitalization would be invaluable in bolstering financial inclusion and diversifying their oil-dependent economies, but their governments must first partner with the private sector and international development organizations in strengthening national digital infrastructure. 

Diverse and vibrant Asia-Pacific is emerging as the world’s most exciting region for fintech. Regulators, financial institutions and fintechs are intent on cultivating digital talent and developing innovative solutions like artificial intelligence. Regional demand for fintech apps is surging.¹⁰ Although Asia-Pacific fintech investment shrank in 2020 amidst the COVID-19 pandemic, it rose to USD $7.5 billion in the first half of 2021.¹¹ Steep competition between jurisdictions—especially in the shadow of a digital powerhouse like China—will ensure that growth in fintech continues to accelerate.

Wealthy and established economies like Australia, Hong Kong, South Korea and Taiwan are pursuing ambitious digital plans. Taiwan, Asia’s top economic performer of 2020 and one of the world’s most competitive economies, will be a key market to watch. Its regulators have sought to lower entry barriers for fintechs, strengthen cybersecurity and data protection frameworks, and promote the development of disruptive technologies. Hong Kong is similarly aiming to cement its status as a global financial center. In June 2021, the Hong Kong Monetary Authority (HKMA) announced its Fintech 2025 strategy, which aims to modernize data infrastructure, promote the uptake of fintech by the financial sector, set the stage for the advent of CBDCs and provide more financial and regulatory support for the development of fintech.

Meanwhile, emerging markets like India and Southeast Asia are experiencing incredible digitalization, though structural challenges and the continued effects of the pandemic could stall progress in economic transformation. India’s fast-growing fintech market is currently valued at USD$31 billion, and is forecast to expand by a staggering USD$84 billion by 2025.¹² Its young and tech-savvy population is leading a surge in digital payments, and India’s United Payments Interface (UPI) recorded 3.55 billion transactions in August—an all-time high.¹³

Australia, Hong Kong, India, Japan, Malaysia, New Zealand, Taiwan and Thailand are all exploring CBDCs, which will both promote financial inclusion and interregional and international trade.

The COVID-19 pandemic drove a 2.1% contraction in Africa’s 2020 GDP, its worst recession in fifty years,¹⁴ and reversed years of poverty reduction. Poverty and inequality are set to worsen, and 39 million people across the continent will live in extreme poverty this year.¹⁵ Although regional economic expansion has picked up in 2021, growth is still weak due to a lack of access to vaccines and structural challenges like weak institutions.¹⁶

Although there have been some state-led initiatives to drive fintech, the private sector has been more proactive in promoting disruptive technologies. Mobile payments have surged in Africa over the past few years, and services like Kenyan company Safaricom’s M-Pesa have been instrumental in driving financial inclusion. Fintech ecosystems in Côte d'Ivoire, Ghana, Kenya, Nigeria and South Africa are particularly promising, but must be met with greater regulatory clarity and improvements to national digital infrastructure. Africa still has some of the world’s lowest internet penetration rates, especially in Eastern Africa and Central Africa, at 24% and 26%, respectively.¹⁷

Still, there is reason for optimism on the regulatory front. In February, the Central Bank of Nigeria issued its Regulatory Framework for Open Banking, a month after approving a regulatory fintech sandbox. On 25 October, it became one of the first countries in the world to issue a CBDC. The bank announced the CBDC project in February, after it issued a directive banning banks and other financial institutions from dealing in and facilitating cryptocurrency transactions. Despite the ban, crypto investment continues to gain traction in the state amidst high inflation and frictional cross-border transactions. According to the director-general of the Nigerian Securities and Exchange Commission (SEC), the ban has caused market disruption, and the SEC and central bank are devising a crypto regulatory framework.

Similarly, the Bank of Ghana launched a regulatory and innovation sandbox in February, and in August the bank partnered with a German tech firm to spearhead a retail CBDC trial. Kenya has expanded its fintech regulatory sandbox to include firms with machine learning and artificial intelligence applications, and its central bank governor has addressed the possibility of exploring a CBDC. Côte d'Ivoire has also signaled an interest in exploring a CBDC.

The South African digital agenda for this year is especially robust. Signed into law in 2013, its enforcement of the Protection of Personal Information Act (POPIA) finally went into full effect on 01 July. The South African Reserve Bank has partnered with the Bank for International Settlements (BIS) Innovation Hub and the central banks of Australia, Malaysia and Singapore to trial the use of CBDCs in cross-border transactions. A cross-border CBDC would be crucial in making remittances faster and cheaper, especially as South Africa is the continent’s largest remittance send-market, at a volume of USD$921 million in 2020. Approximately 50% of its remittances are sent via informal channels.¹⁸;

In May, South Africa’s Cybercrimes and Cybersecurity Act was signed into law. The Act requires electronic communications service providers and financial institutions to report cybersecurity breaches to the SA Police Service, within 72 hours of becoming aware. The Act also criminalizes cyber fraud, extortion, forgery, the sending of harmful data messages and the unauthorized access of personal data, a data storage medium or computer system. Perpetrators face fines and prison sentences of up to 15 years.¹⁹ Lastly, South Africa is considering the development of a cryptoassets regulatory framework as crypto becomes increasingly popular in the state.