Financial technology (fintech) is dramatically evolving and spans a broad range of services. From online money transfers to automated savings platforms to cryptocurrency wallets, fintechs has become more accessible through societal developments. The emergence of new initiatives within the financial sector has given rise to innovations within insurance, payment services, investments and credit provisions, and these new technologies are being embraced globally.
There are four main sectors that fintechs fall into: payments (including online wallets and cryptocurrencies); investment and financial advice (including automatic trading); credit and capital provisions (such as peer-to-peer lending and crowdfunding) and insurance. Payment services are arguably the most innovative sector. For example, mobile wallets, now available through mainstream banks, allow users to store credit card details online and use them to make payments, through various different means including smartphones.
Cryptocurrencies are completely digital; they have no physical properties, are only available online and are finite. They also have several unique qualities: they use peer-to-peer networking to prevent overspending, and are completely decentralised, with no server or central authority. Peer-to-peer transactions means that network participants can transact directly without the need for a bank to process the transaction. Bitcoin, the most well-known digital currency was created in late 2008 by Satoshi Nakamoto, and today has a market capitalisation of over $76,000,000,000 (at time of writing), highlighting the magnitude of its development. Today there are hundreds of different digital currencies, such as: Ethereum, Dash, Litecoin, Monero and Anoncoin. Each currency is underpinned by ‘blockchain’, a de-centralised technology. Blockchain allows payments to be made very rapidly between members of a decentralised digital network, separate from the mainstream banking system.
Potential risks of Fintech
Criminal financing: Fintechs offering pre-paid card services and international transfers are especially vulnerable to money laundering risks. Moreover, digital currencies have traditionally been exploited to fund illicit activity, including money laundering. In particular, it is the anonymity that they can offer to users that is of concern to regulators.
Terrorist financing: there is evidence that highlights fintechs have been utilised to fund terrorism. A recent report found that pro ISIS Sheikh Adbullah Al-Faisal had provided instructions for people to ‘donate to the dawah of Skeikh Faisal’ via Western Union transfer. Moreover, there were also claims that Bahrun Naim, the mastermind of the 2016 Jakarta attacks, used Paypal to fund terrorist activities in Indonesia.
However, there are mixed opinions about the extent of the current threat of digital currencies being used for terrorist financing. It is widely believed that terrorists do not have the means and knowledge to use for example cryptocurrencies for terrorist funding. In 2016 Europol released a report stating that there was no evidence that digital currencies were being used by ISIS to do so. However, these claims are also disputed. Yaya Fanusie, a former counterterrorism analyst for the CIA found that terrorist organisations were using fintechs innovatively to improve their financial situations. For example, The Ibn Taymiyya Media Center (ITMC) sought bitcoin donations in a bid to fund fighters; although the campaign was slow and relatively unsuccessful, it is evidence that terrorist groups are becoming savvier in their financing efforts.
Authored by Leah; image by GoodCall