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.
EdaFace 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.
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“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.
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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].”
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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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