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‘Regulatory uncertainty makes business planning for fintech companies very challenging’

Interview with Kokila Alagh, founder of KARM Legal Consultants

Kokila Alagh the UAE-based legal consultancy firm KARM Legal Consultants in 2018. Among its focus areas are fintech, blockchain, insuretech, medtech, data protection, and cyber laws. She is also a board member of MENA Fintech Association, a not for profit association that “fosters an open dialogue for the MENA Fintech community,” seeking to “…[shape] the future of financial services” in the MENA (Middle East and North Africa) region.

Alagh talked to Fintech magazine through an email interview recently. Here is an edited excerpt:

Can you talk a little bit about your background and your work, especially in the field of Fintech?

KARM was officially launched at the Global Legal Forum in 2018 at the Peace Palace, The Hague – the home to the International Court of Justice and the mecca for the global legal community. KARM is my third venture in the region. I have founded and have been a managing partner of two full-service law firms in the past.

At KARM, we have built a multidisciplinary team of lawyers who are willing to look at the law and legal solutions unconventionally. Our niche expertise extends to new technology projects in the fields of fintech, blockchain, crypto-assets, data protection and privacy, robo-advisory, etc. KARM was founded with the idea of being the bridge between the startups/SMEs and conglomerates and the regulators.

Specifically, with respect to fintech, KARM advises on the appropriate and legal use of various technologies, from the stage of developing a fintech solution, to fintech transactions. We represent a client before the financial and other regulators as needed. We advise on various areas of crowdfunding, electronic-payment platforms, digital banking, peer-to-peer lending and digital investment management, amongst various other aspects related hereto. 

With various regulatory bodies globally working actively in this space, we are able to provide advice and services to clients related to corporate and licensing models, regulatory compliance, capital and fundraising, consumer protection, sector-specific regulations and sandbox testing models.

What are the major legal challenges in integrating fintech into the traditional financial structure?

The rapid growth of emerging fintech initiatives globally has led to a number of challenges and risks from a legal perspective. The primary challenge for fintech integration is navigating through the complex and intricate financial regulations and requirements that have been previously created for traditional financial structures.

Globally, regulators have been playing catch-up to the rapid development of fintech, and it has been especially challenging for regulators to find the right balance between the encouragement of the emerging technologies and the need to regulate adequately.

Regulatory uncertainty makes business planning for fintech companies very challenging, and the financial and compliance cost of regulation has resulted in new companies exiting the market. Therefore, it is imperative for a clear assessment of the regulatory risk which will be fundamental to a fintech company’s success.

Fintech companies also are largely funded by either traditional funding (such as venture capitalists) or alternative modes of financing and this brings certain legal considerations with respect to funding options and aligning this with the company’s future growth plans.

Further, fintech companies collect and process large amounts of data to create solutions that adhere to market trends and consumer preferences. With respect to this, fintech companies need to ensure compliance with data protection legislation applicable to their jurisdiction and adopt appropriate cyber resilience and data governance practices.

Traditional financial institutions have appreciated the benefit of innovation that fintech has brought to the market and globally are looking into partnering with emerging technology to accelerate the development of fintech.

This creates legal challenges in terms of mergers and acquisitions to identify the appropriate type of collaboration to protect the interests of SME fintech companies and to secure their intellectual property rights.

This will require legal advice on deal negotiation, legal and regulatory due diligence and the relevant commercial considerations.

You have been involved in the AMF (Arab Monetary Fund) paper on ‘Alternative Modes of Finance: Overview and Guidelines for the Arab Countries’. Talk about this.

The sphere of alternate financing has been created by the onset of retreat from the services of the mainstream banks, finance houses and other financial (credit) institutions, which have been challenged by limited assets and capital constraints, leading to a slow credit cycle and low returns on equity. Defective and outdated business models are decreasing the fortunes of these credit-shy institutions such as, inefficient money transfer practices which ultimately cost banks billions every year in foregone revenue.

The growing demand for credit from the business and consumer markets, including informal markets, have forced global financial market infrastructures regulators to encourage fintech innovations, however, with the reciprocal responsibility of adequate regulation thereof – achieving a necessary balance between growing, continuous innovation (accepting this to be a need and not to be stifled unnecessarily) and regulation of financial technology innovations. The subject of alternative forms of financing and liquidity creation is highly regarded to be the need of the hour, pre-Covid-19 and post; but now more than ever.

Our AMF paper captures the current state of the fast-paced, evolving financial market and to highlight the environment in which tokenization is used as a viable means of liquidity creation, in its varied forms; and also – the stimulus of a drive away from traditional finance to the new age, alternative finance solutions, including that of crowdfunding and peer-to-peer lending, together with technological innovation bolstering this further.

It seeks to provide an in-depth analysis of the alternative modes of finance available to the market and provides guidance concerning tokenization projects, as well as crowdfunding and peer-to-peer lending ecosystems, for the proper and adequate regulation thereof, for adoption and implementation as may be appropriate, by any authority desirous to do so.

The paper has also provided recommendations on key measures that the authorities should consider and adopt, while developing or revamping a national regulatory framework.

You are a board member of MENA Fintech Association. Can you tell us about the scope and type of work this organization does?

The MENA Fintech Association (MFTA) is a one-of-its-kind organization that brings together start-ups and entrepreneurs, corporates and financial institutions, professionals and academia, regulators and investors. Our firm KARM Legal is the founding member of the organization and I am in charge of the policy and governance vertical.

Under the initiatives taken by MFTA, the Association along with KARM has released “Regulations Simplified,” a publication for simplifying the digital assets framework provided by the Abu Dhabi Global Market, UAE for the industry.

KARM, through MFTA, has also undertaken the drafting of policy and regulatory guidelines for the ambassadors and members of the Regional fintech Working Group of the Arab Monetary Fund on “Cyber Resilience Oversight Guidelines for the Arab Countries, Concerning Financial Market Infrastructures” and also “Digital Identity and e-KYC Guidelines for the Arab Countries” and “Alternative Modes of Finance: Overview and Guidelines for the Arab Countries”.

From the onset, the aim of the organization has been to unite the community to promote collaboration and stimulate discussions about the development of fintech and other forms of emerging technologies.

Can you talk about the commonly used alternative sources of finance for SMEs and larger institutions?

Alternative finance, an initiative introduced by the United Nations Development Programme (UNDP) can broadly be defined as the sources of funding which have emerged outside of the incumbent banking systems and traditional capital markets. It is considered an umbrella term, encompassing a wide range of financial solutions — most notably, that of crowdfunding, peer-to-peer lending and more recently, tokenization.

Global leaders operating as crowdfunding platforms had introduced new opportunities to source funds for small and medium-sized enterprise (SME) campaigns for investors to invest in. In recent years, the rise in the formation and implementation of alternative finance solutions has been nothing short of extraordinary. It’s speedy and expansive growth cannot be denied, nor overlooked. Alternative sources of finance that are available to SMEs and larger institutions include crowdfunding, tokenisation, P2P Lending and online invoice trading.

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