BigTech gets a little sandy, sanctions hit right before the holidays and one group wants to level the playing field across the EU.

We share our financial regulatory highlights from the week of 16 December 2019.

BigTech in the Sand

ZA Bank, backed by insurance tech giant Zhong An Online, has begun offering virtual bank services in Hong Kong through a coveted virtual banking HKMA license.

No doubt influenced by the Hong Kong-UK fintech bridge program that was piloted earlier this year, the virtual banking service will be operating through a regulatory sandbox overseen by the HKMA.

The sandbox will see ZA Bank operate in a separate regulatory environment from the rest of the financial market on a trial basis. This will allow the regulator to closely scrutinize technological risks and potentially roll out the service to a wider customer base as the bank meets stricter regulatory requirements.

It’s great to see the Hong Kong Money Authority embrace fintech sandboxes this way and speaks volumes to how strong an impact regulatory relationships like GFIN and fintech bridges have had on modernizing regulatory behavior.

These partnerships aren’t just going to bring more modern and streamlined banking processes to customers. By working together closely, regulators may even be able to strengthen each other in the fight against financial crime – there’s potential for significant progress beyond supporting startups.

Sanctions Through the Holidays

US senators approved a measure Tuesday that would sanction companies involved with Russia’s Nord Stream 2 pipeline project.

The project, a partnership between Germany and Russia, involves building a $10.6 billion natural gas pipeline under the Baltic Sea. It’s expected to carry 55 billion cubic meters of natural gas to Germany each year once completed; doubling the amount the country currently imports from Russia.

Many believe both Germany and Russia would both benefit economically from the deal, but there are also those who argue that it increases Europe’s (especially Germany’s) dependence on Russia’s supply of the valuable energy commodity.

US lawmakers on both sides of the aisle agree, expressing concern that this increased dependence would expand Russia’s influence in Europe and would result in a security risk for both the US and Europe.

Even though the project is in its final stages of construction and the sanctions are unlikely to prevent the project from moving forward, the proposed measure aims to hinder the final phase of construction by targeting those contracted to work on the pipeline.

Specific entities have not yet been named, though Swiss company Allseas, which was contracted to build the offshore portion of the pipeline, is largely expected to be included.

The measure was folded into the National Defense Authorization Act (NDAA), which was overwhelmingly approved by the House of Representatives a week earlier and includes $738 billion in defense spending. It cleared the Senate smoothly, with 86 approving it and only 8 voting against. President Trump is likely to sign it into law within a few days.

Leveling the Playing Field

The European Commission’s Expert Group on Regulatory Obstacles to Financial Innovation has called for regulators to become more adaptable to the market.

The group, which consists of 14 large financial institutions and universities, and lacks any startup representation, has suggested that a new regulatory framework should be built. This new framework would focus on making sure that activities which create the same risks are overseen by the same rules.

It’s a focus on creating a level playing field based on the risk rather than any other category. The aim is to tackle inconsistent regulation across the EU and make sure that all players are treated equally. An egalitarian suggestion, but without the input of startups who would be so affected it’s unclear whether or not this would have unexpected fallout.

There are four key areas that the group drilled down on. Responding to risks offered by AI and Distributed Ledger Technology, harmonization of regulation across the EU, reconciling data protection with the opportunities offered by fintech and considering the impact of fintech on consumers from a financial inclusion standpoint.

The main issue appears to be one of inconsistency, as different territories across the EU regulate in different ways. 5AMLD and 6AMLD may play some part in homogenizing the regulatory requirements for fintechs and banks but they’re focused mainly on preventing exploitation of products and may not go far enough.

However, the money laundering directives show that regulatory divergence is a key concern for the EU so this report may have some success for the financial institutions. How that plays out, in reality, is anyone’s guess at this stage.

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