Latvia’s apex bank welcomes fintech

The global rise of fintech innovations and emerging technologies has prompted regulators worldwide to grapple with the need for comprehensive frameworks. While countries like the United States and El Salvador have prominently embraced new technologies, others have quietly entered the arena. Among them is Latvia, a Baltic nation bordering Estonia and Lithuania.

Marine Krasovska, Head of Financial Technology at Latvijas Banka (Bank of Latvia), the nation’s central bank, shared insights during a recent interview about how Latvian regulators are addressing novel technologies like cryptocurrencies and artificial intelligence (AI).

Unlike neighbouring Estonia, which pioneered clear regulations and guidelines for digital currencies, Latvia has yet to regulate these assets. Under Latvian tax law, cryptocurrencies are classified as capital assets and are subject to a general capital gains tax rate of 20%.

In 2020, the Financial and Capital Market Commission (FCMC), one of Latvia’s financial regulators, issued a public warning about crypto fraud. The FCMC’s cautionary stance was influenced by the relative lack of regulatory oversight in Latvia’s crypto sector compared to traditional financial markets.

Innovation Hub as a Regulatory Entry Point

While Latvia has not implemented specific cryptocurrency regulations since the FCMC’s warning, Latvijas Banka has been running its Innovation Hub for the past five years. Participation in this hub is not mandatory for fintech companies, but it is recommended as an initial entry point to the Latvian market. The central bank offers this service free of charge to both international and domestic firms.

According to Krasovska, businesses that engage with the Innovation Hub can engage directly with regulators, allowing them to understand the necessary business licences and assess risks. This pre-licensing process, introduced last summer, enables fintech firms, especially those dealing with digital assets, to create a package of documents for review. This streamlined approach aims to focus the licensing process on core ideas rather than the application’s quality.

Krasovska noted that the Innovation Hub has witnessed growing interest from companies offering “crypto and electronic money institution services” in the past year.

Internal Adoption of Technology

Krasovska also highlighted the central bank’s commitment to adopting new technologies internally to streamline operations. Initiatives include migrating central bank data to the cloud and incorporating AI technologies like OpenAI’s ChatGPT chatbot.

The central bank plans to integrate artificial intelligence and ChatGPT into its operations this year. Krasovska emphasised the bank’s two-year-old internal lab, which experiments with various technological solutions. ChatGPT feasibility studies have already been conducted to help summarise large volumes of unstructured information, such as tax documents.

The central bank also leverages AI for data management projects and code supervision.

Synthetic Data Creation

Regarding data, Krasovska revealed that the Bank of Latvia is spearheading a project focused on synthetic data. When newcomers or tech firms developing solutions request datasets for training business models, the bank cannot legally provide them. To address this challenge, the bank is working on creating integrated databases that generate synthetic data.

This initiative aims to provide businesses with access to various types of data for testing and understanding how their tools function before scaling to serve real customers. For example, a firm might require access to a substantial transaction database to assess the performance of monitoring tools. The bank’s integrated database project seeks to bridge this data gap.

Latvia’s proactive approach to fintech regulation and adoption of emerging technologies reflects its commitment to fostering innovation in the financial sector. While cryptocurrency regulation remains on the horizon, the Innovation Hub and internal adoption of AI technologies underscore the nation’s receptiveness to fintech advancements. The central bank’s efforts in synthetic data creation further demonstrate its dedication to facilitating technological growth within the industry.