Latvia central bank opens to fintech with ‘Innovation Hub’
Fintech innovations and emerging technologies have swept the world, causing global lawmakers to rush to understand and regulate them.
While some countries like the United States and El Salvador have had a public relationship with adopting new technologies, others have quietly joined the game. Among these is Latvia, a small country located in the Baltics, neighboring Estonia and Lithuania.
Cointelegraph spoke with Marine Krasovska, the head of financial technology at Latvijas Banka (Bank of Latvia) — Latvia’s central bank — to better understand how regulators in the country are dealing with new technologies like cryptocurrencies and artificial intelligence (AI).
Unlike its neighbor Estonia, which was the first European country to provide clear regulations and guidelines for digital currencies, these assets remain unregulated in the Latvian landscape. The Latvian Personal Income Tax Act defines crypto as a capital asset subject to the general capital gains tax of 20%.
Back in 2020, one of the country’s financial regulators, the Financial and Capital Market Commission (FCMC), warned the public about crypto fraud — particularly given that in Latvia, crypto companies “operate in an infrastructure that is currently characterized by lower regulation than in the financial and capital markets.”
An upcoming hub of innovation
Since early warnings from the FCMC, Latvia has not developed new cryptocurrency regulations. However, Krasovska explained that in the last five years, the central bank, which is the primary regulator in Latvia, has been operating its Innovation Hub.
Krasovska said participation by fintech companies is not mandatory; however, the bank advises it as a “first entry point” to the Latvian market. The central bank offers this service free of charge for international companies and those originating from Latvia.
“When businesses come to the Innovation Hub and begin to describe their business model, sometimes we start to understand what companies actually need and don’t need,” she said.
She added that it’s an opportunity for businesses to talk in person with regulators to understand the business licensing needed and get risks assessed.
“We always suggest for companies to bring a lawyer to disclose interpretation risks. Interpretation of legislation is a very high-level responsibility.”
Within the Innovation Hub, the bank has also created a pre-licensing process. According to Krasovska, this was created to help fintech companies — particularly those dealing with digital assets — create a “package of documents” that they can receive feedback on regarding the quality.
Related: Germany’s blockchain funding increases 3% amid market downturn: Report
“So when the official application goes in,” she said, “the license process will be focusing on the main ideas rather than the quality of the application. This new pre-licensing began last summer.”
“We want to see more innovation on the market. But we also want to see that the risks are managed in a proper way.”
Krasovska said that last year, the Innovation Hub had 72 consultations with around 40% of all participants from Latvia. She commented that the hub’s data reveals increased interest from companies in “crypto and electronic money institutions services.”
Adoption from the inside
Along with helping businesses thrive in the Latvian fintech landscape, Krasovska said that the Latvian central bank itself is adopting new technologies to streamline its processes from the inside.
This includes moving central bank data into the cloud and adopting AI technologies like OpenAI’s popular chatbot ChatGPT.
“We, as a central bank, will also start this year to integrate artificial intelligence and ChatGPT in our work. Not just not just trying to do some kind of studies as everyone is using it, but we’re starting to adapt it in terms of we have identified our needs.”
She said the central bank created an internal lab two years ago, which began experimenting with different kinds of technological solutions.
Related: European Banking Authority calls for early adoption of stablecoin standards
She highlighted ChatGPT feasibility studies the bank has conducted, which will help it summarize large quantities of documents, such as tax documents that she called “not structured information.”
Krasovska also said the bank employs AI to help with data direction projects and supervise code.
Synthetic data creation
When it comes to data, the fintech executive said the Bank of Latvia is spearheading a new project in relation to synthetic data.
She said that when newcomers or tech companies developing new solutions ask for a data set to train business models, it has nothing it can legally provide.
“This year and also next year, we will be working with the database ideas from which we can create this synthetic data that is like a synthetic lottery or something along those lines,” she said.
“Then companies can come and use these different types of data to understand how their tools work or don’t work before they scale the business and offer their solution to real customers.”
For example, businesses may need access to a large transaction database to understand how related monitoring tools work, “so what we’re doing right now is working on this integrated database,” she said.
Latvia and the current state of crypto
Over the summer, a report from the Latvian central bank said that local investments in crypto assets had declined by 50% over the past year.
“The number of the people purchasing crypto-assets as well as making payments with payment cards to invest in crypto-assets in Latvia declines.
This can be explained by global developments such as the negative sentiment of investors, detected cases of fraud and cases of… pic.twitter.com/uOIbJvIlsi
— Joshua Rosenberg (@_jrosenberg) August 4, 2023
The report was based on findings from payment card usage, revealing that 4% of the population bought crypto assets in February 2023, compared to 8% in the same month of 2022.
When asked about the sentiment toward cryptocurrencies in Latvia, Krasovska pointed to the crypto market conditions in combination with slumping market trends globally: “Globally, the financial markets are the way they are right now, and of course, this is [excluding] the crypto [market].”
Magazine: Crypto lawyer Irina Heaver on death threats, lawsuit predictions: Hall of Flame
Aside from the rocky conditions for the crypto community brought on by the lingering bear market, regulatory difficulties in major markets have caused investor sentiment to become less optimistic.
However, Krasovska pointed toward the European Union’s adoption and implementation of the Markets in Crypto-Assets (MiCA) legislation as something the central bank can lean on.
“With the adoption of MiCA, we can ensure very high standards for financial services.”
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Cutting the annual allowance for cash ISAs could backfire in multiple ways, an influential group of MPs has warned the government.
For months, speculation has been growing that the chancellor may slash the yearly limit for tax-free savings – potentially from £20,000 to £10,000.
The government is hoping to encourage savers to invest in stocks and shares ISAs instead, which can offer greater long-term returns and improve financial health.
But according to the Treasury Committee, slashing allowances would be unlikely to achieve this – and could lead to higher prices for consumers.
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Chancellor faces tough budget choices
Building societies rely on cash ISA savings to fund mortgage lending – and a drop in deposits might lead to higher interest rates or fewer products on the market.
Committee chairwoman Dame Meg Hillier said “we are a long way” from achieving a culture where substantial numbers of Britons invest in the stock market.
“This is not the right time to cut the cash ISA limit,” she warned. “Instead, the Treasury should focus on ensuring that people are equipped with the necessary information and confidence to make informed investment decisions.
“Without this, I fear the chancellor’s attempts to transform the UK’s investment culture simply will not deliver the change she seeks, instead hitting savers and borrowers.”
Read more: How to get started with a stocks and shares ISA
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Govt ‘not satisfied’ after inflation sticks at 3.8%
The latest figures suggest two-thirds of contributions to ISAs in the 2023/24 tax year went to cash accounts – bringing total holdings to £360bn.
An estimated 14.4 million consumers solely save in a cash ISA, with the average balance standing at £6,993.
Surveys suggest that, if allowances were cut, consumers may move their cash to alternative savings accounts where they would have to pay tax on interest.
Skipton Group executive Charlotte Harrison previously warned: “Building societies, which funds over a third of all first-time buyer mortgages, rely on retail deposits like cash ISAs to fund their lending.
“If ISA inflows fall, the cost of funding is likely to rise, and that means mortgages could become both more expensive and harder to access.”
She claimed a policy change could end up “penalising savers who want low-risk, flexible options” – adding: “Cash ISAs work. Undermining them doesn’t.”
Read more money news:
What’s behind surprising rise in retail sales
Tesco rolls out bodycams to security staff
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Tax hikes possible, Reeves tells Sky News
Chancellor Rachel Reeves said: “At the moment, often returns on savings and returns on pensions are lower than in comparable countries around the world.
“I do want to make sure that when people put something aside for the future, they get good returns on those savings.”
The committee’s warning comes amid speculation over whether Ms Reeves will raise income tax at next month’s budget – breaking a key Labour manifesto pledge.
Newspaper reports have suggested that the basic rate of income tax could be increased for the first time since the 1970s – up 1p to 21%.
This could raise about £8bn and help tackle a black hole in the country’s finances, but risks squeezing consumers further as a cost-of-living crisis continues.
A 1p rise to the higher band of income tax – taking that rate to 41% – is also believed to be under consideration, but this would only boost the nation’s coffers by £2bn.
Ms Reeves has refused to rule out such a move, telling Sky’s deputy political editor Sam Coates that she is looking at both tax rises and spending cuts ahead of her statement to the Commons on 26 November.
The Bank of England is worried that a rise in financiers’ lending to data center lending may cause an AI bubble reminiscent of the dot-com crash in the early 2000s.
The rumored nomination of Michael Selig follows the CFTC nomination process hitting a snag in September when Brian Quintenz was withdrawn.
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