Fintech 2022

• Published date: 04 April 2022
• Subject Matter: Finance and Banking, Technology, Financial Services, Fin Tech
• Law Firm: Walkers
• Author: Mr Niall Esler, Shane Martin, Bill Laffan and Conor Daly

Law and Practice

1. Fintech Market

1.1 Evolution of the Fintech Market

Ireland is home to well-developed and globally recognised technology and financial services sectors and is a fintech hub.

IDA Ireland, the country's industrial development agency, reports that Ireland is the world's second-largest exporter of software, and that 16 of the top 20 global technology firms and 20 of the top 25 global financial institutions operate from the jurisdiction.

Ireland is also home to a large number of fintech firms, the European home for global innovation labs and incubators. The Central Bank of Ireland (the "Central Bank") established its Innovation Hub in April 2018 to provide a direct and dedicated point of contact for firms developing or implementing innovations in financial services based on new technologies, outside of the existing formal regulator/firm engagement processes. The Innovation Hub had facilitated 253 engagements as of the publication of the Central Bank's 2020 update.

Increase in Fintech Activity in Ireland

Recent years have seen an increase in fintech activity in Ireland and in the number of entities operating in the country, reflecting the positive ecosystem that has been developed. Ireland is a popular location for firms seeking an EU base, which has increased further following the UK's withdrawal from the EU ('Brexit'), so as to "passport" their Irish authorisations to provide services into other EU member states. Examples include Coinbase Stripe, Square/Block, SumUp and Modulr which have obtained electronic money institution authorisations, which also allow for the provision of payment services.

Domestic Initiatives

Domestic firms, such as Wayflyer, have also established themselves successfully. Several Irish retail banks are seeking to create a digital money transfer service in response to fintech challengers. This initiative is currently subject to competition law scrutiny. The government's strategy for the development of Ireland's international financial services sector to 2025, Ireland for Finance, includes actions to help drive fintech, including blockchain technologies. In the short term, fintech developments in Ireland are likely to continue to focus on the payments sector, regulatory technology ("regtech"), artificial intelligence and blockchain, among other sectors. From a regulatory or supervisory perspective, it is expected that anti-money laundering (AML), outsourcing and data protection will remain key topics. The Central Bank has recently published Guidance on Operational Resilience and on Outsourcing which, along with existing guidance on IT and Cybersecurity Risks, will require all regulated firms in the Irish market to review their frameworks.

EU Legislative Developments

EU legislation is implemented into Irish law and/or is directly applicable. In the context of virtual assets, the Fifth Money Laundering Directive (Directive (EU) 2018/843) (5MLD), transposed into Irish law by the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021, impacts providers engaged in various services in respect of virtual assets. Regulation (EU) 2020/1503 on European crowdfunding service providers for business (Crowdfunding Regulation) provides a framework for equity and peer-to-peer lending-based crowdfunding within the EU and allows for operators of crowdfunding platforms to obtain authorisation as a crowdfunding service provider, which can be passported across the EU. The Crowdfunding Regulation came into force on 10 November 2021.

Other EU initiatives impacting fintech include the European Commission's September 2020 adoption of the Digital Finance Package (the "Digital Package"), which includes a proposal for a regulation on markets in crypto-assets ("MiCA"), a proposal for a regulation on a pilot regime for market infrastructures based on distributed ledger technologies or DLTs (the "Pilot Regime") and a proposal for a regulation on digital operational resilience for the financial sector ("DORA"). These proposals are not yet law and are moving through the European legislative process, and are subject to amendment prior to implementation. The current draft of MiCA proposes to implement a legislative framework including rules applicable to the issuance of crypto-assets and the provision of various services in relation to crypto-assets. MiCA also seeks to implement market abuse-type rules in relation to crypto-assets and an EU supervisory regime. On 21 November 2021 the Council of the European Union announced that it had adopted its position on MiCA and DORA, and that negotiations are ongoing. The Pilot Regime is at a more advanced stage of the legislative process and is expected to come into force in the second half of 2022, and to apply nine months later. The European Securities and Markets Authority (ESMA) commenced a stakeholder consultation process on the Pilot Regime on 4 January 2022.

The Digital Package follows a public consultation in respect of a proposed EU regulatory framework for crypto-assets (the "Crypto Consultation"). In its April 2020 response, the Central Bank stated that it is supportive of the initiative and welcomes the development of a more harmonised approach to crypto-assets, although it raised concerns with certain issues, including the monetary policy implications of the emergence of global stablecoins.

The Eurosystem published a new framework for overseeing electronic payment instruments, schemes and arrangements (which will also cover crypto-asset-related services, such as the acceptance of crypto-assets by merchants within a card payment scheme and the option to send, receive or pay with crypto-assets via an electronic wallet) which comes into force in November 2022 (PISA Framework).

2. Fintech Business Models and Regulation in General

2.1 Predominant Business Models

The Central Bank has commented that fintech activity in Ireland is at its most intense in the payments sector. This is reflected in an increased number of authorised payment institutions and electronic money institutions in Ireland in recent years, including Stripe, Coinbase (a cryptocurrency platform), MoneyCorp, Square, SumUp, and Modulr. Bigtech firms have also established in this space, and it is likely that payment services will continue to be an area of focus in Ireland. This is helped by the existing fintech and payments-friendly ecosystem, while Brexit has also resulted in a number of payments firms locating their EU operations in Ireland.

Other areas for innovation include regtech, insurance, digital identity and asset management, with loan and investment crowdfunding set to increase.

In the context of its Innovation Hub, the Central Bank has commented on the growth and maturity of blockchain and an increase in engagements regarding crypto-asset infrastructure (such as exchanges and wallet providers), as well as a broadening of use cases for blockchain beyond crypto-assets and as an element of firms' overall technology stack.

2.2 Regulatory Regime

Fintech firms must look to the regulatory regimes that may be applicable to their business model on a case-by-case basis. Fintech-specific legislative developments are in the pipeline, including the introduction of MiCA and the Digital Package, which will provide a bespoke regulatory framework for crypto-assets in due course. Recent fintech-specific legislative developments include the implementation of amendments to AML legislation applying a registration requirement and AML obligations to certain virtual asset service providers and the implementation of the Crowdfunding Regulation.

Payments

In relation to the provision of payment services or the issuance of electronic money, the primary rules to be considered are the European Union (Payment Services) Regulations 2018 (the 'Payment Services Regulations') - which transpose Directive 2015/2366/EU (PSD 2) into Irish law - or the European Communities (Electronic Money) Regulations 2011 (the 'Electronic Money Regulations') - which transpose Directive 2009/110/EC (the 'Electronic Money Directive') into Irish law. The domestic Irish regime governing money transmission businesses under the Central Bank Act, 1997 ("CBA 1997") may be relevant to a money transmission service falling outside the Payment Services Regulations.

Banking

Challenger banks seeking to undertake "banking business" require a bank licence under the Central Bank Act, 1971 ("CBA 1971") and will be subject to the Irish implementation of the EU Capital Requirements Directive (Directive 2013/36/EU) (as amended) and the directly applicable EU Capital Requirements Regulation (Regulation 575/2013/EU). Banking business, in summary, means any business that consists of or includes receiving money on own account from members of the public either on deposit or as repayable funds, and the granting of credits on own account. Licensing decisions are taken by the European Central Bank.

Credit institutions authorised in other European Economic Area (EEA) jurisdictions may passport their authorisation into Ireland, which requires notification to their regulator in the first instance. All companies that are not licensed banks (or passported credit institutions) must avoid including 'bank' in their name, as this is restricted under the CBA 1971.

Regtech

Generally speaking, the provision of regtech services is less likely to be a regulated activity in Ireland as these will typically involve supporting technical services rather than regulated financial services. However, a case-by-case analysis is required.

Investment Services/Asset Management

Depending on the services provided, a fintech firm providing asset management solutions may be subject to regulation. For example, if the activities constitute "investment services" in respect of "financial instruments" for the purposes of European Union (Markets in Financial Instruments) Regulations 2017 (the 'MiFID Regulations'), an investment firm authorisation will be required, unless...