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In a wide-ranging interview with the Bank of Lithuania, Lukas Jakubonis, it’s head of financial market development, spoke to VIXIO about how the country has positioned itself as fintech friendly hub of Europe, why Brexit was an opportunity, and how it plans to deal with topical issues, such as the rise in crypto-asset use.
“In the beginning, around 2015, the Bank of Lithuania, the Ministry of Finance, Invest Lithuania and other institutions set a goal for Lithuania of being established on the fintech map,” said Jakubonis, who has been working with the central bank since 2017.
“This was an ambitious goal and to achieve it, we figured that we needed to understand what was interesting for new companies in the market. After that, Lithuania approved the National Strategy on Payments, which set out the measures to be taken in order to achieve the goal.”
If statistics, such as those released last week by the Bank of Lithuania are anything to go by, this has been a huge success for the country.
Between 2017 and 2021 the number of EMI and PIs registered in the country have doubled, rising to 141 firms.
“Since 2015, we have optimised the licensing process while meeting the highest EU standards,” said Jakubonis. “We now have one of the most efficient processes in Europe and have attracted big names to the country. Getting companies like Revolut here meant we had a kickstart and had attracted other financial institutions.”
Open banking encouraged the fintech sector’s growth in Lithuania, according to Jakubonis, who comes from a legal background.
And as the EU begins to focus on revising the second Payment Services Directive, bringing the prospect of PSD3, he said that it is convenient that regulation is catching up with market innovations. However, he also noted that the Bank of Lithuania does not have any concrete ambitions for the regulation yet.
“Clarifications on financial services such as on-demand paychecks and Buy Now Pay Later would be helpful, but we don’t have any expectations in particular.”
The loss of the UK as a member state meant that there were many London-based firms looking for a new EU base. But with 27 other potential possibilities, Lithuania faced significant competition to win these businesses registration.
“We saw Brexit as an opportunity and took measures to attract businesses from Britain,” he said.
“We knew that there was an opportunity to attract investment here. We have really put a lot of hard work into this and participated in a number of conferences, as well as meetings with British companies.”
Now, Lithuania is adapting to its maturity as a market. Last week, the central bank's payments chief, Dovilė Arlauskaitė said: “Our aim is to strengthen risk management and compliance in the sector which underlies fintech and to ensure that business development grows only in tandem with compliance maturity.”
Jakubonis added that the central bank has gone from a focus on expansion to a new stage, focusing on quality and business culture.
“We are aware of the risks that come with expansion, and with quantity, quality needs to follow. We must face the mirror and see where we can make improvements. The major part of expansion took place in the payments sector, but we are looking at other forms of fintech, such as IT and technology integrators, for the future.”
For Jakubonis, the Newcomer Programme, has been helpful here. It offers potential financial market participants to evaluate their opportunities in Lithuania and gives an insight on legislative and licensing requirements for businesses aiming to start their activities in the country.
“This has been a success and acts as a one-stop shop for new market entrants. We provide consultations for companies seeking a licence in Lithuania and can provide them feedback at a very early stage,” he said. “It helps firms to understand supervisory expectations during the licencing, and it helps us as regulators to understand new business models.”
As an innovation-friendly institution, he continued, the central bank offers the opportunity to test the products and services in a regulatory sandbox and also participate in international projects.
For example, the bank took part in a cross-border testing initiative by the Global Financial Innovation Network (GFIN).
Together with other central banks and one company, the regulator developed and tested the proof of concept model for sustainability reporting, including a data model, following international standards and guidelines for ESG reporting.
It has since been crowned by the Europe FinTech Awards as the Data Initiative Of The Year 2022.
Payments Access
The central bank has also found ways to connect non-banking entities to Single European Payments Area to increase competition and bring additional benefits to consumers.
It’s CENTROlink payments infrastructure acts as an intermediary service for EMIs and PIs to operate through, and has been beneficial for non-bank payment service providers (PSPs).
“It operates in a cheap way and means that PSPs don’t need to negotiate for years and years with banks. These institutions are also able to safeguard clients’ funds with the central bank, which has proven attractive for EMIs,” he said.
Like most of Europe, Lithuania has taken a tough stance on Russia since its invasion of Ukraine.
In fact, VIXIO’s research shows that the Baltic state has been one of the most active jurisdictions in the world this year for regulatory updates, with this being driven largely by sanction changes.
“We strongly condemn the events that have taken place in Ukraine and are strict on AML and sanctions in regard to Russia,” said Jakubonis.
There are no Russian state-owned banks in Lithuania, only minor links via just a few institutions out of 700 that the regulator supervises, he added. “Still, we fully understand that financial institutions or people linked to Russia may seek workarounds for their operations and we have taken steps to prevent them.”
“We have reassessed the existing users of the system and have begun the process of disconnecting four companies whose ultimate beneficial owners are related to Russia from CENTROlink,” he continued.
“These companies will no longer be able to make payments in SEPA through CENTROlink.”
In addition, the central bank has appealed to financial market participants to allocate all necessary resources to properly implement the EU’s sanctions against Russia and to prevent attempts to circumvent the restrictions imposed by the EU.
Moreover, it has emphasised the need to strengthen the prevention of money laundering and terrorist financing, to assess transactions with third parties with particular care, and to collect, monitor and update customer information with great responsibility.
“Can we be more strict? I’m not sure. But we strongly advise that financial services linked to Russia should be monitored closely,” he said.
Crypto seperation
Crypto-assets are another issue that is a hot topic in Lithuania, as well as on the pan-European level. For example, the European Supervisory Authorities (EBA, ESMA and EIOPA) warned consumers about risks of crypto-assets this March.
“We don’t think that consumers are properly educated about crypto-assets, and we are trying to do more, for example, reaching out to schools,” said Jakubonis.
In general, he mirrored fellow European regulators in stating that crypto-assets are a huge risk.
Lithuania itself has become a home to a large number of crypto exchanges. “Estonia introduced strict measures and thus many firms moved over to Lithuania, as being registered here required a simple procedure.”
It is currently the country’s Financial Crime Investigation Service that is responsible for the supervision of crypto-asset companies, but with MiCA, this will likely shift over to the central bank.
“However, our government is already looking at changes regarding issues such as AML and is proposing stricter legislation. For example, amendments to the Law on AML/CFT were passed by the Parliament on June 30. It tightens the regulation of the crypto-asset segment, increases transparency and strengthens risk management,” he said.
“In general, this will be a good change as we won’t have to wait for MiCA to remove the bad apples.“
Jakubonis said that the Bank of Lithuania holds the position that licenced financial market participants should not participate in activities or provide services associated with crypto-assets.
“They should also ensure separation of their activities from activities associated with virtual assets if there are any,” he added.
“Payments to a financial market participant’s account can only be made in traditional currencies, thus no additional risks are entailed.
“If they provide services to third parties related to crypto-assets, the reinforced AML policy should be applied accordingly. All these safeguards help to protect financial market participants from the loss related to the extreme price movements of crypto-assets.”
