Last month, the Cyprus Securities and Exchange Commission (CySEC ) announced the establishment of a new Innovation Hub, which will focus on FinTech and RegTech developments that rely on distributed ledger technology (DLT). The Innovation Hub is the latest in a string of initiatives launched across Europe to address the disruptive power of this new technological force.
There are few headline grabbing innovations that have attracted as much enthusiasm and scrutiny as distributed ledger technology. DLT consists of information stored on a public ledger whose integrity is protected by the use of cryptography. The most well-known version of DLT is blockchain technology, which is more often associated with cryptocurrencies, both niches in which several of Cyprus’ regional neighbours have already made significant investments. However, its unique features mean it could be adapted by and transform a variety of sectors including finance, insurance, healthcare and even the public sector, too.
CySEC’s Innovation Hub should become operational in September 2018. While specific eligibility criteria have yet to be announced, it is expected that firms that wish to have their sector or specific products participate in the Innovation Hub will be required to submit an official application in the autumn. Once a firm has been selected, it will have access to specialised regulatory expertise as well as industry and academic roundtables. Most importantly, participants will be able to voice their interests and concerns as the CySEC works to improve its understanding of the risks and benefits of blockchain-based innovations.
While innovation offers the potential for economic growth, it often proves a headache for regulators. New technology can upend an established rulebook, requiring regulatory bodies, which by their nature are both conservative and cautious, to adapt quickly in order to safeguard the interests of consumers and the broader economy. Consequently, facilitating a dialogue between fintech representatives and regulators is an essential function of the Innovation Hub.
Demetra Kalogerou, Chair of the CySEC, believes that “The establishment of the Innovation Hub marks an important and exciting step for CySEC’s supervision of new and innovative Fintech companies in Cyprus. In promoting closer ties with these fledgling but fast-growing industries, we aim to best protect investors by fully understanding the risks and benefits these new products bring.”
Cyprus’ Innovation Hub is yet more evidence of the island’s accommodative stance towards blockchain-based activities. For instance, the University of Nicosia is one of a few higher education institutions to accept tuition payment in the form of cryptocurrencies. The university also created the first Master of Science in blockchain and distributed ledger technology. More recently, there have been discussions about integrating Bitcoin with Cypriot point-of-sale processors later this year.
While the Innovation Hub will help improve the regulatory climate for both businesses and entrepreneurs eager to capitalise on the opportunities presented by DLT, Cyprus will be competing with other Southern European countries to attract the most promising innovators. Most recently, Spain’s Ministry of Economy announced a draft law that provides the foundation for a fintech sandbox. This initiative would create a space for start-ups and established firms to test new products or services. Additionally, the Maltese parliament passed a new regulatory framework for DLT activities earlier this summer. It is also expected that France will introduce a new regulation concerning initial coin offerings sometime in the next year.
That said, the adoption of DLT-friendly regulation shouldn’t be seen as a zero-sum competition. Instead, regulatory developments in each of these countries are a sign that the region is open for business and should help propel growth. However, regulatory fragmentation is a potential risk. Looking forward, it may be necessary for the EU to intervene in order to harmonise the rules governing DLT-based activities.