Luxembourg has chosen to adopt a tech-neutral strategy to regulating Fintech. This means new Fintech sponsors looking to establish in Luxembourg are subject to existing regulation which already applies to Fintech’s traditional competitors. Through this approach, Luxembourg is steering clear of the regulatory sandboxes which have been established in other jurisdictions. Although this approach may have less “curb appeal” for Fintech start-ups, it may be that Luxembourg’s approach to creating a Fintech platform is a more sustainable one.
Regulatory sandboxes allow Fintech companies to launch their products under lighter regulation. Although approaches differ, the pattern is usually: apply for an exemption, launch a product, and then graduate from the sandbox once a regulatory threshold is reached. Following graduation (exiting the sandbox), the product or service is typically subject to comprehensive financial regulations which apply across all other technologies. Ideally, this approach should foster Fintech innovation given a less onerous set of regulations, keeping costs and complexity down. But does it create sustainable Fintech growth?
Sandboxes may provide for a “safe zone” but are not exempt from other broad EU requirements. For example, in Europe, the implementation of the 5th anti-money laundering directive meant that several start-ups found themselves confronted with complex requirements which smaller crypto exchanges were unable to meet. Some, including bitcoin exchange Bittr, were forced to exit the market. Creating a dedicated regulatory environment for new technologies is helpful, but sandboxes do not work in complete isolation. The UK also launched its regulatory sandbox in 2016 amid much celebration. Many requirements are waived during the life of the program; however, companies are still forced to comply after they graduate. This can create its own set of challenges: technology, systems, processes, and staff may have been developed in a specific manner and shifting to meet new requirements can be costly and burdensome.
Luxembourg has positioned itself as a Fintech hub but it certainly cannot claim to have created a regulatory sandbox. This approach may pay off in the longer term. It implies that initial business launches could be more costly and complex when compared to dedicated programs but firms are ultimately prepared to absorb regulation as their business grows. The strategy in Luxembourg is to incorporate regulatory requirements into the design phase as opposed to launching Fintech start-ups in a regulatory vacuum. This reduces the burden of reversing entrenched processes or technology upon graduation potentially reducing the inflow of new companies without compliance-tested business models. For those which do enter the market, the environment is well balanced and offers significant opportunities for growth.
This has increased Luxembourg’s credibility. Comprehensive regulatory requirements provide reassurance to investors, consumers, and companies wishing to engage with Fintechs. Paypal and Amazon have established their European headquarters in Luxembourg and AirBnB is processing all EU payments here. This reinforces the high level of market maturity which is beneficial to new entrants. Their presence assists in developing a regulatory and product approach leveraging existing regulation. Luxembourg’s robust financial services and payments sector means that there is a skilled talent pool and support in the form of consultants and advisors. Fintechs benefit from highly engaged trade associations and working groups which are dedicated to developing solutions for the industry.
Instead of creating a sandbox, Luxembourg has created an ecosphere.
Admittedly, this approach does have its limits and may be susceptible to competition from other jurisdictions. In Switzerland, a company operating within the regulatory sandbox needs only CHF 300,000 as initial capital. Certain smaller start-ups may have no choice to launch in a location with fewer initial conditions. Those which do choose to launch in Luxembourg will benefit from the wider offering and access to the EU market.
The Luxembourg financial regulator, the CSSF, has also demonstrated a willingness to encourage growth in this area. Local companies such as Finologee are providing video identification services for banks. Luxembourg has also passed legislation to facilitate blockchain transactions. Luxembourg is well positioned to attract Fintechs and could accelerate growth through the issuance of more formal legislative or regulatory guidance to assist new market entrants. Such a step does not require expanding the existing regulatory framework: it merely clarifies it for the Fintech industry. This initiative, together with Luxembourg’s advantages and robust platform, position the country as a destination of choice for Fintech innovators.