The fintech sector has emerged quickly and grown significantly. This is particularly the case for the market for cryptoassets, which has grown to a value of just over USD 1,200 billion, equalling around SEK 12,400 billion, in the space of just a couple of years. However, the market only represents around 0.3 per cent of the size of the global financial system, which had total assets of around USD 470,000 billion at the end of 2020.
The fintech firms and their operations can, through their use of new technology, improve efficiency in the financial system and lead to cheaper and better financial services. At the same time, this must be weighed against the fact that they can give rise to many kinds of challenges for authorities and risks to the financial system. Cryptoassets in particular are associated with various kinds of risks. Fintech operations, including operations in cryptoassets, have therefore increasingly climbed up the agenda of central banks and various standard-setting bodies.
Fintech activities can lead to circumvention of existing rules
Because of the fintech sector’s rapid growth, regulation has not kept up on all fronts, especially not for cryptoassets. As an example, there are certain stablecoins that work as money market funds in that their reserve largely consists of assets such as commercial paper, but without following the same requirements as are typical for such funds. A money market fund is a kind of fund that invests in liquid, short-maturity assets such as commercial paper. The funds aim to preserve the value of the investment or offer a return equalling the money market rate. In these cases, the stablecoin issuer uses new technology to circumvent the rules.
Access of new entities to central settlement systems differs between countries
Central settlement systems make up the very core of financial infrastructure. All payments go through them. In these systems, large payments are settled in central bank money to reduce the risks in the transactions. Central bank money is the money which, in Sweden, is issued by the Riksbank and is on the Riksbank’s balance sheet. For the general public, it is currently only available in the form of cash. The money that for example banks have in accounts in the RIX system is central bank money. For large payments in Swedish kronor, it is the Riksbank’s RIX system that is the central payment system. Participants in the RIX system are credit institutions, investment firms, clearing organisations, securities depositories, central counterparties and the National Debt Office – that is, traditional financial entities. As the fintech sector and its participants grow, it will become increasingly important for relevant authorities to decide on which entities should have access to settlement systems and which requirements should be placed on them. In the UK for example, non-bank payment service providers are permitted to apply for access to the Bank of England’s settlement system for large payments. Bank of England (2017), “Bank of England extends direct access to RTGS accounts to non-bank payment service providers”, news item, 19 July 2017. The fintech firm Wise (formerly TransferWise), which operates in cross-border payments, was the first non-bank payment service provider to gain access to the Bank of England’s settlement system. Bank of England (2018), “First non-bank service provider (PSP) directly accesses UK payment system”, news item, 18 April 2018.
In the EU, it is, among other things, the Settlement Finality Directive that limits which entities have access to central settlement systems. Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems. The directive has not been implemented uniformly in all countries. See Payments Report, 2021, Sveriges Riksbank and Financial Stability 21:2, Sveriges Riksbank. In Sweden, for instance, it has been implemented in a way that makes many fintech firms unable to participate in the Riksbank’s RIX system. An example of a fintech firm that is a RIX member is Klarna. A review in the EU is in progress to ensure that it is implemented consistently.
Supervision and oversight of fintech firms
As described previously, fintech firms must follow different rules based on the operations they conduct, just like other firms in the financial sector (see the section Fintech firms adhere to traditional financial legislation). They must generally also apply for authorisation from FI and come under their supervision. There are however some firms with operations that do not require them to apply for authorisation due to how the rules are devised. One example is Getswish. FI (2020), “FI och Swish - frågor och svar” [FI and Swish – questions and answers], Finansinspektionen. Published 22 January 2020. Accessed 25 April 2022. [online] Available at: FI och Swish – frågor och svar | Finansinspektionen. Operations that are not subject to authorisation are not supervised either. The Riksbank is responsible for oversight of financial entities. However, according to the current Sveriges Riksbank Act, the Riksbank only has the right to retrieve information from entities under FI’s supervision. In the new Sveriges Riksbank Act, which is proposed to enter into force on 1 January 2023, The Riksbank will monitor operations that are of particular importance to financial infrastructure in Sweden. This could potentially include certain fintech firms. This makes it difficult for the authorities to access information on operations that neither require authorisation nor are supervised. Consequently, it can be difficult to capture risks before they transpire.