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Steady Steps Towards the Expansion of Financial Technology

Steady

As time passes by, we get the need for change to keep up with its developments. The past decade has emphasized an urgent need for evolution, as life has become faster, and interpersonal transactions have accelerated, especially financial ones. These transactions have opened the door wide for technological advancement to facilitate both banking and non-banking financial transactions using technology.

This has led to the phase of completing transfers and financial operations of diverse types through electronic platforms or mobile applications. Consequently, these transactions have earned the right to be legally regulated, and they have received sufficient attention in their technological development. Various countries are now competing to establish legal principles and laws to regulate financial technological activities.

Despite multiple legal enactments attempting to establish foundations and broad lines for a comprehensive law regulating financial technological operations and activities in Egypt, such as the laws regulating the use of non-cash means of payment, the Central Bank Law, the Electronic Signature Law, and the Personal Data Protection Law -which are considered steps towards regulating various electronic financial activities- they were not sufficient to comprehensively regulate non-banking financial transactions. Therefore, Law No. 5 of 2022 was issued to regulate and develop the use of financial technology in non-banking financial activities.

In a simplified and concise manner, we are pleased to present to you the key points of this law, without delving into any other legislation or regulation, along with expressing our subjective opinions on its advantages and disadvantages.

The objective of the Law

Upon reading the Financial Technology Regulation Law, it is evident that its primary purpose is to promote awareness of the financial inclusion concept.

This concept aims, primarily, to widely use electronic financial services and benefit from these services to manage finances properly. This objective is explicitly stated in Article 1, and it is reiterated in Article 2, emphasizing the authority of the Financial Regulatory Authority to achieve the purpose of the law. This is the cornerstone for automating various payment or settlement operations throughout the Arab Republic of Egypt.

Digital Identity and Legal Validity

The law addresses the most significant points of digital transformation, namely the establishment of a digital identity for each user. This identity is recorded in a dedicated digital registry. Unlike other digital accounts we use online or technologically, the law takes the first solid steps toward giving this digital identity the necessary legal validity to protect rights. Article 11 explicitly states that this digital identity has the legal validity of official documents for proof. Thus, we see a clear legislative direction toward automating the use of official documents, whether in financial activities or other fields.

Once this idea is successfully implemented, it may be extended to various areas. In the future, we might witness individuals issuing powers of attorney electronically using their digital identities without the need to go to the real estate registry. Additionally, the use of digital identity in automating judicial procedures might become common. The digital identity could become equivalent to the national ID card we carry and use in various daily activities.

Digital and Smart Contracts

Although raising awareness is the main goal, ensuring rights in financial contractual relationships between individuals has also received attention. Article 1 defines digital contracts as a contract concluded electronically between individuals.

It states that these contracts may be smart contracts that execute their provisions automatically. From our perspective, this could grant each party the ability to use the rights of the other party automatically upon concluding the contract. However, the legislator did not elaborate on this in detail, hinting at the issuance of new legislation specifically regulating smart contracts in the future.

Legal Form of Companies Operating in Financial Technology

Although the law does not explicitly state the legal form required for practicing non-banking financial activities using financial technology, we see that it has implicitly limited the legal form of companies engaged in such activities to be joint-stock companies. This is indicated within the requirement of a bank deposit certificate confirming the full payment of the issued capital. The law does not divide the capital of any company into “authorized” and “paid-up” unless it is a joint-stock company.

Furthermore, the legislator stipulated in Article 9 that the minimum issued capital should not be less than two hundred and fifty thousand pounds, which is the same minimum required for joint-stock companies. Additionally, as mentioned in Article 14, the Financial Regulatory Authority has the authority to take certain measures concerning companies operating in financial technology activities. In case the company threatens the interests of shareholders, the authority can call for the dissolution of the board of directors of the company engaged in financial technology activities. From this, we deduce that the intended legal form is joint-stock companies.

Based on the above, we find that not only banking activities require incorporation through a joint-stock company, but also non-banking financial activities are subject to the same requirement. This is due to the sensitive nature of financial transactions for individuals.

Jurisdiction of the Financial Regulatory Authority to Achieve the Purpose of the Law

Examining the second chapter of the law, it is conclusively stated that the establishment of companies wishing to engage in non-banking financial technological activities must occur exclusively before the General Authority for Financial Supervision. This authority has become inherently specialized in overseeing the affairs of these companies, starting from their establishment, regulating their affairs, handling complaints from those dealing with them, and applying strict penalties to violators. This is due to the sensitive nature of handling individuals’ finances by such companies.

The legislator went even further by making the establishment request subject to the discretionary power of a committee comprising technical and legal elements. This committee decides on the establishment within 30 days, a seemingly lengthy period compared to the establishment of other commercial companies. However, this is a precautionary measure to ensure the presence of these sensitive companies in the Egyptian economic environment.

The legislator highlighted this commitment by implicitly making a rejection of establishment a tacit decision in case the committee does not issue a decision within the specified period. This emphasizes the explicit approval requirement for the existence of such companies.

The law prohibits these companies from conducting activities in Egypt without obtaining a license from the Financial Regulatory Authority and adhering to the conditions and regulations outlined in the law.

Licensing for Conducting Activities – Specialized and Startup Companies

In continuation of the effective role of the Financial Regulatory Authority, which began with its authority over the establishment of companies operating in non-banking financial activities using financial technology, the legislator specified that mere establishment does not authorize the practice of such activities.

These companies must obtain explicit approval from the Financial Regulatory Authority to engage in licensed activities. This approval is granted after ensuring that the company has the necessary facilities, technological infrastructure, security and protection systems, and insurance. This step aims to ensure the protection of users’ interests in these applications and the preservation of their data.

The law requires the payment of the necessary fee for obtaining this license, with a maximum limit of fifty thousand pounds for companies specialized in non-banking financial activities using financial technology. As for startup companies in this field, the legislator demonstrated special consideration.

It supports them by issuing a temporary license for a period of only two years, exempting them from the aforementioned licensing fee. This move encourages startup companies to work in this field and promote financial technology. However, the law does not specify the fate of these startup companies after the expiration of the two-year temporary license.

It remains unclear whether these companies will undergo a re-evaluation by the Financial Regulatory Authority to decide whether they can continue their activities or if they will be directly subject to the payment of the licensing fee like other specialized companies. This aspect is expected to be clarified in future legislation.

Organizational Laboratory for the Initial Test

With a focus on interests and in a smart move by the Financial Regulatory Authority, the law, in Article 9, establishes an organizational laboratory for testing applications. This laboratory allows practitioners of non-banking financial activities using financial technology to assess their innovative applications before offering them to customers. Although the legislator did not make it mandatory for practitioners of financial activities to resort to this laboratory before launching their innovations, we see that it explicitly mandated this commitment.

Some may argue against this due to concerns about confidentiality and not disclosing the mechanism of innovating these applications, even if the testing entity is the Financial Regulatory Authority itself. However, we argue against the feasibility of such an objection and recommend that the Financial Regulatory Authority provides the necessary protection for the owners of these applications against any unofficial leaks or disclosures during the testing process.

In conclusion, we express our support for anything aligned with the rapid development of the world around us. Law No. 5 of 2022 was a decisive step in a long journey of upcoming steps towards the proliferation of financial technology and the dissemination of the financial inclusion concept. This will pave the way for various transactional and activity fields in our daily lives, eliminating paper transactions and saving effort and time, benefiting humanity in the face of upcoming challenges.

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