“Innovation may introduction new dimension to risks and new challenges.”

working on prudential requirements, Know Your Customer (KYC) and more. However, these requirements are tiered in payments, such that firms with larger risks have to disclose and comply with more detailed regulation, whereas smaller players that carry smaller risk don’t.

For Bradley Rice, partner at Ashurst, this difference is key to a healthy regula- tory landscape.

“Payments and e-money firms come in many different guises and are of many different sizes,” he says. “Trying to regulate them all in the same way that you would a bank is not necessarily the right way to regulate the industry.

“That said, there are some payment firms, particularly those with e-mon- ey licences, that can do pretty much everything a bank can, but isn’t regulated like a bank.”

An example of this would be in prudential requirements where e-money firms do not have to hold nearly so much capital as banks.

However, for Rice, as the payments ecosystem continues to develop and the regulatory landscape does with it, the gap between the larger players with the heavier regulatory burdens and the smaller players with the lighter touch compliance could grow to such an extent that more tiers in the middle should be added to this approach.

“The gap at the moment is such that the fully regulated tier has become so big and diverse that they almost need to create another tier within that,” he goes on to add.

For Rice, this could look like a threetiered approach with smaller firms at their current level of regulation, systemically important firms facing the full set of requirements and a tier in the middle for bigger firms, which are not as systemically important.

Crypto concerns

Where regulation could be posing the most problems for fintech innovation may be in crypto, particularly in the face of the UK’s financial promotions regime.

The proposed update to this regulation categorised crypto as a high-risk investment, meaning that any adverts put out by crypto-asset services providers (CASPs) to audiences in the UK would need to be authorised first. The consultation faced high levels of criticism when it was released due to the very low number of organisations that would be allowed to approve firms’ advertising campaigns.

However, according to the consultation report, published at the beginning of February, firms who are already registered with the FCA under the anti-money laundering regime are exempt from this; and therefore do not have to seek third-party approval to run ads.

But, as only 34 CASPs are registered under the UK’s anti-money laundering regime, a large number of companies in the space will still need to find third parties to pre-approve any advertising campaign – whether they’re based in or outside the UK.

This could be challenging, says Revolut’s Adamos: “Current evidence suggests a lack of suitably authorised firms in the market who would be willing to approve crypto promotions, meaning that overseas providers will find it difficult to market their services in the UK without obtaining an FCA registration.”

Regulators will continue to prepare crypto guardrails in the wake of the FTX collapse at the end of last year. But exactly how they implement this remains to be seen.

As the payments sector continues to innovate and change, the dynamic between the industry and regulators will need to remain balanced to promote an innovative and trustworthy payments landscape.

“We should avoid approaching issues regarding the relationship between regulation and innovation with an ‘either or’ attitude,” says BIS CPMI’s Rice. “They can and should co-exist. Healthy regulation is an essential foundation upon which innovative solutions can be developed and thrive in a sustainable way.”