Understanding fintech

Fintech, short for Financial Technology, encompasses technology-driven financial innovations that foster the creation of novel business models, applications, processes, or services, thereby revolutionizing existing paradigms. The overarching aim of fintech innovation is to foster competition and deliver superior, more efficient, expedient, and contemporary services to Latvian clientele.

Prospects for crypto related business in Latvia in 2024

In 2024, the prospects for crypto-related businesses in Latvia appear promising, albeit within the context of a dynamically evolving regulatory landscape and a maturing global cryptocurrency market. Several factors contribute to the favourable outlook for crypto ventures:

  1. Regulatory clarity: the regulatory framework governing cryptocurrencies and blockchain technology has likely evolved, providing greater clarity and certainty for businesses operating in this sector. Clearer regulations can enhance investor confidence and foster innovation while mitigating risks associated with illicit activities.
  2. Technological innovation: advances in blockchain technology continue to drive innovation across various industries, including finance, supply chain management, and healthcare. Latvian crypto businesses can leverage these technological advancements to develop innovative solutions and gain a competitive edge in the market.
  3. Financial infrastructure: Latvia's robust financial infrastructure, including its banking system and payment infrastructure, can facilitate the integration of cryptocurrencies into mainstream financial services. Collaborations between traditional financial institutions and crypto firms may emerge, offering new avenues for crypto adoption.
  4. Government support: the Latvian government's stance on cryptocurrencies and blockchain technology may become more supportive, with initiatives aimed at promoting innovation and entrepreneurship in the sector. Government-backed programs and funding opportunities could further stimulate growth in the crypto industry.
  5. Global trends: the global cryptocurrency market is expected to continue growing, driven by increasing institutional adoption, technological advancements, and shifting consumer preferences. Latvian crypto businesses can tap into this growing market demand and expand their reach beyond national borders.
  6. Talent pool: Latvia boasts a skilled workforce with expertise in technology, finance, and entrepreneurship, providing a conducive environment for crypto startups to thrive. Access to talent and resources can facilitate the development and scaling of crypto-related projects.

While challenges and uncertainties may persist, the outlook for crypto-related businesses in Latvia in 2024 appears optimistic, with opportunities for growth, innovation, and collaboration within the dynamic cryptocurrency ecosystem. However, businesses should remain vigilant and adaptable to navigate regulatory changes and market dynamics effectively.

Moneyval's gray list

In the realm of Latvian fintech, a spectrum of developments emerges, intertwining both favourable and adverse occurrences. In the year 2018, Latvia teetered on the edge of Moneyval's gray list, a precarious position potentially jeopardizing the nation's financial standing. Through diligent efforts of governmental entities, Latvia evaded inclusion in the “gray list”; nevertheless, its financial standing sustained notable repercussions.

However, amidst the challenges, rays of optimism pierce through. Over a relatively brief interval, Latvia adeptly restructured its financial sector regulations, aligning them with stringent AML standards. While residual perceptions of unreliability linger, these may be attributed to informational gaps. Consequently, concerted efforts are underway, engaging in various industry forums, notably the esteemed European showcase, Money20/20, in collaboration with FKTK and international counterparts. These endeavours aim to bolster Latvia's financial and technological stature on the global stage.

Regrettably, Latvian fintech presently lacks comparable leadership or robust state backing. Nevertheless, the industry possesses abundant technological acumen and expertise, positioning it to deliver financial technology services par excellence.

In a paradoxical twist, the prospect of compromised financial repute catalysed positive change, compelling a fortification of financial regulations. Presently, Latvia boasts the most stringent anti-corruption measures, coupled with rigorous legal standards and an internal control management framework. Consequently, Latvian financial service providers emerge as reliable partners for enterprises and investors worldwide. This impetus led to the inception of Banking as a Service (BaaS), alongside e-commerce solutions, identified as strategic imperatives.

Emerging trends in startup financing

In recent years, a discernible trend has emerged within the startup landscape, emphasizing increased participation of startup teams in co-financing initiatives. An illustrative example of this paradigm shift is evidenced in a programme aimed at bolstering startups venturing into export markets. The transition from indiscriminate grant allocation to a more discerning approach, attributing this shift to the proliferation of “tourism” ventures. Consequently, cash allocations are being curtailed, with an emphasis on augmenting co-financing from the startup entities themselves.

Nevertheless, avenues for cash infusion into startups persist, facilitated by European institutions earmarking 15 million euros to Latvia for fostering early-stage startups. ALTUM bank, has commissioned three esteemed acceleration funds — Overkill Ventures, BuildIT, and Commercialization Reactor — to steward this financial allocation. Each fund embarks on a rigorous selection process, enrolling 8–10 startups into their cohorts, and subsequently investing 20–50 K euros in these ventures, with additional injections into the most promising entities. Notably, these investments entail inclusion in the startups' capital structure, albeit under lenient conditions, given the governmental origin of the funds.

Regulatory landscape

The FID extends comprehensive support to fintech enterprises at every developmental stage, offering guidance on licensing, regulation, and supervision. The principal objective is to mitigate innovation barriers by furnishing professional counsel in payment systems, crowdfunding platform operations, and crypto assets. The regulatory body aids market participants in grasping the nuances of business continuity, ICT, and cyber risk management. A pivotal focus of the FID entails the deployment and advancement of Supervisory Technology (SupTech) and Regulatory Technology (RegTech) solutions, rendering fintech regulation in Latvia more contemporary, digitalized, and automated.

In 2018 heralded the enactment of legislation aimed at supporting startups in Latvia, marking a significant milestone in fostering entrepreneurship. Although promulgated in January 2017, the law remained largely dormant owing to incongruent selection criteria. Subsequent amendments have widened the aperture, facilitating greater inclusivity and accessibility.

Critical to qualification under this law are nine stringent criteria encompassing capital turnover, company longevity, employee credentials, and innovativeness, among others. A pivotal criterion necessitates the inclusion of at least one investment from a venture capital fund (min. 30 K euros), an acceleration fund (min. 15 K euros), or a business angel (min. 15 K euros) in the startup's portfolio. This criterion serves as a litmus test, signifying external validation of the venture's potential, thereby enhancing its eligibility for state support.

Tax incentives for qualified startups

Qualifying startups stand to benefit from tax incentives delineated under two distinct options:

Option A entails a reduction in social tax liabilities, with contributions calculated based on two min. salaries (680 euros) instead of the entire salary. Furthermore, income tax for employees is reset to zero, offering substantial savings.

Option B offers co-financing for highly qualified personnel, entailing reimbursement of 45% of wages through European subsidies. Notably, eligibility hinges upon the criticality of the role to product development, necessitating either relevant educational credentials or substantial work experience in the field.

Investment opportunities

In Latvia, securing funding for business development poses a formidable challenge, reflective of the conservative risk perception ingrained within the European investment ecosystem. However, avenues for funding exist, albeit contingent upon the merit and viability of the project. Notably, access to Polish and Estonian investment funds augments the local investment landscape, whilst fostering a culture of prudent investment practices. Noteworthy is the emphasis on maintaining founder equity, with investors cognizant of the deleterious impact of over-dilution on long-term viability.

In conclusion, while navigating the investment landscape presents challenges, Latvia's burgeoning startup ecosystem holds promise, buoyed by governmental support, private initiatives, and a conducive regulatory framework.

Facilitating fintech market entry

The expeditious penetration of markets holds paramount significance for businesses, mitigating financial losses attributable to delays. Collaborating with TK Deal affords fintech companies and startups the opportunity to swiftly deploy products under our brand umbrella.

The choice confronting entrepreneurs hinges upon constructing bespoke infrastructure or leveraging pre-existing solutions. Each avenue bears its own merits and demerits, contingent upon business strategy, experience, and scale. Custom infrastructure endows autonomy, flexibility, and liberty, albeit necessitating substantial time and capital investments. Conversely, opting for turnkey solutions not only economizes resources but expedites market entry. TK Deal's comprehensive infrastructure for non-bank financial entities streamlines integration complexities, thus ensuring prompt and cost-effective market access for payment institutions or e-money issuers.