April 6, 2022 | Ali Abbas

Finance as a force for good: 4 things we learned at IFGS 2022

It’s been a big week for financial services in the UK, spearheaded by Innovate Finance’s Global Summit 2022. The week kicked off with City Minister, John Glen announcing emphatically that the UK sees “enormous potential” in crypto, adding that the it is open for business.

As the UK looks set to become a global hub for crypto and innovation (and in anticipation of the Royal Mint’s highly-anticipated NFT offering), we reflect back on the 4 key takeaways from IFGS 2022:

1. Crypto could change the world…or the world could change crypto

“I’d like to see crypto overthrow the world bank!” announced Cathy Mulligan, Professor at Instituto Superior Tecnico to rapturous applause. There was a lot of talk about crypto this week, but this was the first time someone had said something that challenged the status quo.

Crypto is unique because it contravenes the traditional mould for finance, investments and currency altogether. However, much of the current talk – especially from the regulators – is around how to fit crypto within the existing system of financial services. Mulligan’s statement was a short and enthusiastic acknowledgment of what crypto could be. Why squeeze crypto to fit a mould when it could be used to create a new system – one that is equitable and accessible to all?

This was a running theme throughout the event; how can we take emerging technology and make use of it to the benefit of society – not simply make money from it. Crypto, it was said, is often seen as exciting because it means “money”. There was an undercurrent suggesting that we need to shift that focus – crypto should be exciting because it means “change”.

2. Crypto regulation is coming, but it won’t be simple

One of the first talks of the week was hosted by law firm Shearman & Sterling about the changing regulatory perimeter for crypto. The room was packed. Why? Because everyone wants to know what the future holds for crypto regulation and how it could affect them.

As we’ve mentioned in the past, regulation can be seen as the enemy of crypto – it could stifle innovation and make people scared to create. This isn’t so for Ali Hassan from the Dubai International Financial Centre Authority who sees regulation as an “enabler for crypto and key to the future of finance”. Of course, Dubai is fast becoming a crypto hub; if they’re welcoming regulation, everyone should.

Historically, crypto may have been considered too small to warrant regulatory attention. This is no longer so according to Marion Laboure of Deutsche Bank, who noted that the two essential regulatory triggers have been activated:

1. Crypto now has enough retail access to warrant regulation (17% of consumers in US are using it).
2. It is big enough to cause financial stability issues.

Shearman & Sterling professed with some certainty that “regulation for crypto is coming and it will 100% be regulated”. However, it’s also “complicated, unclear, difficult to understand and rife with exceptions”. It’s difficult to know whether particular crypto activities are regulated or not. It looks like we need clarity for crypto – not only regulation.

3. Embedded finance is THE transformational force of 2022

…or so says Lord Chris Holmes of Richmond. And he’s probably right. Embedded finance is a market expected to be worth £3.6 trillion by 2050 – everyone wants to get in on it, but (as with most emerging technology) the regulatory framework is in its nascent stages and is perilously unclear.

Lord Holmes did not shy away from this, confessing that “the government needs to understand this stuff a lot more”. Only then will it be able to put a regulatory framework in place for it.

Regulation aside, much of the conversation steered towards the potential for embedded finance as a force for good. When asked who the winners would be in the space, everyone agreed that it would be consumers. Indeed, in time there is hope that embedded finance could be used to increase equality and accessibility for finance. Imagine, suggested Lord Holmes, the potential that embedded finance could have if the government is able to utilise it for HMRC or the Department for Work and Pensions.

It is likely that the future of embedded finance could see an interesting play-off between traditional financial services and FinTechs. The FinTechs have the edge, they are innovative, flexible and can create new products and bring them to market quickly. Traditional FS, it was suggested, could be (or should be) worried. However, there is also a chance that embedded finance and the technology will – as with many things – simply be swallowed up by big tech, who will end up with the monopoly.

So who are the losers for embedded finance? Again, the panel resoundingly agreed that the losers will be the incumbents and those in financial services who fail to change their mindsets, fail to listen to the consumer, and who refuse to open their minds towards innovation and new technology.

4. We need more cross-border connectivity everywhere

This is a topic that came up time and again over the two days. A lack of cross-border connectivity is stifling the usefulness and effectiveness of technology – especially for compliance and regulation.

The panel discussing embedded finance agreed that regulators across the globe are facing in the right direction, but there are two road blockers:

1. What’s happening in the “guts” of regulation looks good, regulators are working on regulations in different jurisdictions, but these regulations don’t look the same
2. Cross-border connectivity isn’t happening, meaning that regulations continue to be fragmented – meaning more work on interpretation and less time to implement.

The framework for cross-border standardisation is there, but the consensus is that that regulatory bodies need to work together internationally – this isn’t happening yet. This is also true of crypto, ESG and innovation on a broader scale. Richard Fox, Interim Director of International at the FCA, noted that “collaboration is a necessity, we no longer have a practical choice to pull up the drawbridge and regulate things nationally”. To this, the audience became a sea of nodding heads.

However, collaboration isn’t going to happen straight away. Fox had a solution in the interim – we need to look at emerging regulation and say, “even if these regulations are different, can they slot together?”. It’s a nice though, but collaboration is essential – without it we’ll continue to see piecemeal regulation and confused compliance teams.

Keep ahead of emerging regulations and keep ahead of the curve – speak to CUBE.