Think back to late 2021. Who could have predicted 2022 would be, again, an era-defining year in so many aspects? We couldn't. However, in January 2022, our CEO, Krik Gunning, revealed what he thought would be the future trends in the identity solutions space. And he got a few wins in the predictions game.
Predicting crypto: the impossible task?
Predictions in the crypto field are tricky, and everyone will agree that 2022 has brought its share of surprises, to say the least. For example, we could foresee that global regulation around cryptocurrency would tighten. However, we didn't see the sudden crumbling trust in crypto coming.
The slow building of crypto regulations
On June 30, the European Parliament and EU member states presented the Markets in Crypto-assets (MiCA) regulation, which aims to regulate the distribution, offer to the public, and trading of crypto assets.
"Today we put order in the Wild West of crypto assets and set clear rules for a harmonized market." said Stefan Berger, the German center-right MEP who led the negotiations.
While still a proposal, if introduced as currently drafted, MiCA will lay out a framework of requirements for the operation and governance of major crypto-asset issuers and service providers, as well as detailed protections for holders of crypto-assets and other clients of service providers.
Through this legislation, the EU is pursuing its ambition to turn the EU into an attractive yet orderly and regulated place for crypto-asset service providers to do business globally.
While MiCA is due to take effect in 2024 at the earliest, this year's crypto crash and subsequent events have led lawmakers to wonder whether the regulation in its current form could have prevented the FTX episode or any FTX-like situation.
The rapid downfall of trust in crypto
If the EU Parliament thought the crypto world was already a big Wild West back in June, one wonders what they're thinking now.
Many believe the recent FTX crash is the first of many dominos to fall, triggering the greatest challenge facing cryptocurrencies at the moment: lack of trust.
Could this space learn something from fintech and online banking in this regard? Think back to the early days of online banking. Keeping your money on an online platform you had only recently heard of seemed unbelievable. However, regulation, strong anti-fraud systems, and time, created a trustworthy and safe ecosystem. Isn’t it time to rebuild a crypto ecosystem based on trust?
Ethical AI: a license to operate?
At the beginning of 2022, we made another prediction that turned out to be more true than expected: Ethical Artificial Intelligence (AI) has become a license to operate.
“Society at large has become increasingly interested in - and vocal about - how personal data is used and stored by technology companies. There will be more tough questions asked this year and the answers will need to meet a high ethical bar.” Krik Gunning, co-founder and CEO of Fourthline, Jan. 2022
We didn’t only predict that AI would be gaining traction. We believed that banks would need to explain how it is applied to their compliance and fraud processes.
De Nederlandsche Bank, the Dutch financial market regulator, published the report “From recovery to balance" in September, outlining clear rules of engagement for responsible experimenting with digital innovations in the fight against financial crime, specifically in the areas of machine learning and digital identity.
“A condition for responsible innovation is that the underlying compliance processes are in order pursuant to the Wwft, that the IT infrastructure is reliable and that the quality and availability of data are guaranteed. Bias must moreover be avoided. Safeguards must also be in place for privacy and data protection, as well as for the explainability of the models used.” DNB report “From recovery to balance”
You could almost say the prescience here is uncanny. But what is important is that although the DNB provides a scope for experimentation with digital innovation, there is a focus on responsibility, explainability and avoiding bias when it comes AI innovation and data personal data use.
On our radar for 2023: AI & AML
Of course, we will closely monitor developments related to the MiCA regulation. Still, two other fundamental pieces of EU legislation will also keep us busy: The AI Act and the AML Package.
The AI Act
The AI Act lays down a uniform legal framework for artificial intelligence in the European Union. It aims to promote investment and innovation in AI, enhance governance and effective enforcement of existing laws on fundamental rights and safety, and facilitate the development of a single market for AI applications. The current proposal explicitly excludes national security, defense, and military purposes from the scope of the regulation.
The Act is still at the proposal stage. Still, it is expected to be adopted in 2023 following a vote from the EU Parliament and discussions between the Member States, the Parliament, and the Commission (so-called trilogue).
Even as a draft, the Act provides a clear insight into the future of AI regulation. Now is the time to take steps to prepare for it and for the other pieces of legislation that are sure to follow.
The AML Package
In 2021, the European Commission presented a package of various legislations to strengthen the EU's anti-money laundering and countering the financing of terrorism rules. The package includes four legal acts that establish, among other things, the European Authority for Anti-Money Laundering and Countering the Financing of Terrorism.
The Authority will begin its work at the beginning of 2023. However, its direct supervision is only expected to start in 2026, when it should reach its target number of employees.
Importantly, the package also extends anti-money laundering rules to the entire crypto sector, obliging all crypto-asset service providers (CASPs) to conduct due diligence on their customers. This means that they would have to verify facts and information about customers when carrying out transactions of 1000 euros or more.
Like the proposal to establish the AML Authority, the three other legal acts, the AML Regulation, the 6th AMLD, and the amendment on the information accompanying the transfers of funds, are still in the draft stage. The complete package is expected to fully go into effect three years after its ratification.
One element is at the heart of each proposal, court case, or trend we mentioned: trust, or the lack thereof. 2023 will undoubtedly witness considerable regulatory changes for the European financial services landscape. And it might be precisely what our sector needs to (re)build trust.