4 regulatory showdowns affecting the future of finance

From cannabis to cryptocurrency, the future of fintech lies in the hands of regulators. Find out how alternative payments rails, smart contracts, and securities enforcement can potentially change everything.

4. The cannabis industry and payments

People who don’t come in contact with marijuana may think they’re flying high above the regulatory intricacies of the cannabis sector—but this industry reflects telling dynamics between the U.S. federal government, state regulators, and payments companies. From point-of-sale, to payment processing, to banking, the industry faces significant hurdles to operate as a legitimate business; legalized in 18 U.S. states, cannabis is still illegal on a federal level. In uncertain waters, the sector is still a lucrative cash cow, expected to grow into a $30B industry by the end of this year.

Despite the windfall that engagement with cannabis companies may promise, Visa announced in December 2021 that it would ban the use of any Visa-branded product in the cannabis space. Up-and-coming fintechs like ArtisIQ, Paybotic, and AeroPay could upend the industry’s purgatorial financial status, booming by successfully navigating regulatory loopholes, pushing establishment payments companies to rethink their strategy.

3. Proptech and contracts

A burgeoning sector in its own right, proptech faces a slew of challenges matching the sector’s fast pace of development and growth. Proptech’s dependence upon new technologies to rethink how we live births new legal questions. The need to avoid lock-in, letting companies use new technologies within their products and infrastructure when they arise, for instance, requires more dynamic contracts with suppliers and other stakeholders. This affects both the completed products offered by proptechs as well as the construction process, which may include new techniques like digital printing and drones.

Enter a whole slew of (legitimate) liability headaches. Data protection, workplace accidents, air corridor rights for drones, computer bugs, and much more. Proptech is already becoming a promising market for insurtechs and others ironing out the consequences of new technologies.

2. International payments and sanctions

SWIFT has become a trending topic in the context of sanctions against Russia for its invasion of Ukraine. Russia’s ejection from the payment system has, in dramatic fashion, proven how crucial payments rails are in our everyday lives—and, to Russian entities, highlighted the consequences of centralization, potentially affecting their trust in payments networks writ large. We could see the growth of alternative payment systems in the coming months, especially as Russian banks like Sberbank and Tinkoff are rushing to issue Chinese UnionPay-branded cards, which would permit payment functions abroad. Startups like Nium have also introduced alternatives to SWIFT, portending a standoff between scrappier players and establishment players. International organizations as well as SWIFT may draft their conditions for Russian re-entry into payments systems, and also establish conditions for sanctions against other countries in the future.

We’d also be remiss not to mention cryptocurrency. Russian oligarchs looking to evade sanctions have acquired hundreds of thousands of crypto addresses. Mykhailo Fedorov, Vice Prime Minister and Minister of Digital Transformation of Ukraine, called on crypto exchanges to block Russian and Belarusian accounts, and exchanges like Kraken and Binance have pushed back on such demands. Russian workarounds have accelerated a standoff between politicians and the crypto industry, with the former seeking promising regulatory nodes within the latter. We may see louder internal debates among crypto leaders, asking how to acquire the legitimacy and ubiquity of fiat without its regulatory implications. A tall order.

1. Securities and crypto

The elephant in the room: cryptocurrency’s future largely hinges upon its relationship with the Securities and Exchange Commission (SEC) and other regulators. From a massive settlement with BlockFi, to upcoming judgment on the LBRY coin, to potential regulation on NFTs, the SEC has made clear that it’s going to treat crypto as it would other financial institutions. It expects crypto to take its compliance and reporting obligations seriously in turn. The SEC is considering how blockchain-based financial products relate to the Howey test—whether digital assets are merely assets, or financial instruments intended for profit making, or something else altogether.

President Biden’s March 9 executive order on crypto may promise more consistent regulation across government branches, but it offered little in the form of what new regulations would specifically entail. That may work to non crypto-focused fintechs’ benefit in the long run. An emphasis on timeliness and clarity may eventually prevent costly and overdue compliance pivots for all financial institutions. Now it’s just a waiting game for that relationship between financial institutions and regulators to fully materialize.