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Bank of Lithuania chairman considers fintech’s role

Bank of Lithuania’s board chairman, Vitas Vasiliauskas, talks to Alex Irwin-Hunt about the Baltic state’s economic recovery, the fintech revolution and regional co-operation for combating money laundering.
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Vitas Vasiliauskas

Vitas Vasiliauskas

Q: What is the outlook for the Lithuanian economy?

A: The outlook for the economy is quite good. In 2019 we had growth of more than 3.9%, but our expectations for 2020 are milder, at 2.5% growth [as of December 2019]*. In the medium term, we expect between 2% and 3% growth. Last year was the first year since independence that our [net migration rate] was positive. If this trend continues, then we can expect a better situation in the labour market in the medium term. [*As of March 2020, GDP is now expected to fall by 11.4% in 2020, due to the coronavirus outbreak and quarantine.] 

Q: How susceptible is the economy to geopolitical developments?

A: We are a small, open economy, so export markets are important for us. Any changes in the international environment can have a negative impact. With regards to Brexit, the UK isn’t a direct market for us, but is quite important for production chains. We are interested in good trade agreements between the UK and Europe, but negotiations are such that we can’t foresee the possible outcome.

Q: What have you done to ensure rigorous anti-money laundering [AML] processes are in place, following scandals across the Baltic countries?

A: While many talk about the Baltics as one unit, there are differences between the countries. In Lithuania, for example, we established two new departments in the supervisory service: an AML department and an e-money institutions department. The amount of non-resident depositors in Lithuania is currently 2.4%, compared with a historical high of 6% in 2003.

We are involved in the exchange of information among financial supervisors in the Baltic and Nordic regions and making common inspection exercises together with supervisors in other jurisdictions. I think there is room for pan-European decisions, and it would be very helpful to have a pan-European authority that could address AML issues.

Q: What is the background to Lithuania’s burgeoning fintech sector?

A: In the country’s financial sector, more than 90% of all credit is provided by banks. As such, competition is low, which is one of the reasons why Lithuania is so proactive in the fintech area. Another reason is related to diversification. Being dependent on just one source of financing, such as bank credit, can create many problems, as we saw in the previous crisis.

We developed a national strategy for the fintech sector and in 2018 allowed the non-banking sector to connect to our payments system, which was important for newcomers’ choice of Lithuania as a jurisdiction. Now payment and e-money institutions have direct access to the euro payment system, without the need for a correspondent bank or another financial market participant.

I think Brexit has helped, as fintechs are looking for an alternative jurisdiction to acquire a European banking licence. We are quick, yet also responsible, in the licensing process; market participants and applicants find us open and accessible.

Q: How are you dealing with the challenges fintechs present?

A: We understand that fintech companies are innovative, but sometimes do not fully understand the risks related to providing financial services. Our first line of defence is the newcomers’ programme, which is a pre-application process whereby we meet with fintechs to discuss their plans and better understand them. If a company passes this filter, then the formal licensing process begins, whereby we analyse their business and ask them to provide ownership structure information.

If that outcome is positive, then we have a third filter to check for national security threats. A special commission, consisting of representatives from 14 institutions, carries out the assessment. Before granting the licence, we also have face-to-face meetings with shareholders and managers. Afterwards, we have regular meetings with them [to assess] their daily business activities.

Q What is your view on the potential of central bank digital currencies [CBDCs]?

A: CBDCs can help to solve two problems: cross-border payments and financial inclusion. Of course, there are a variety of formats, and discussions are ongoing. We know of the Bank for International Settlements’ initiative and the European Central Bank is discussing these issues, and [Bank of Lithuania] has a high-level task force. I think that this year we can expect to take some practical steps in this area.

I can provide two examples of our work as a central bank in connection to CBDCs. First, we have a blockchain-based sandbox, called LBChain. Second, we have a digital coin project and expect to issue our LBCoin, a digital collector coin, by the end of the second quarter of 2020.

Q: How are you currently regulating cryptocurrencies?

A: We issued our first paper and opinion in 2017 and updated our position in 2019, mostly in relation to initial coin offerings. The main principle of our position is that we do not allow financial market participants to receive payments in crypto-assets, but it is possible to do this using third-party services.

We must consider all EU laws, including the Fifth Money Laundering Directive. Virtual asset exchanges, wallets and service providers must be registered and fulfil AML requirements. Our position is quite conservative, but we are interested in blockchain as a technology and are working on this in the regulatory sandbox.

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