Latvia has a huge potential to raise its profile in the fintech world and attract new businesses to the economy, and this does not require large financial investments, but rather a proactive work on creating a regulated environment and adapting best practices from abroad. This can be achieved by comprehensively adapting the European Commission's regulation on crypto-assets markets (MiCA), ability to pay company base capital as well as some of the taxes using cryptocurrencies.
Finding common ground
While Switzerland is leading the way when it comes to tax payments using cryptocurrencies, Latvian Blockchain development association (LBAA) together with other industry partners have found a common ground with the Bank of Latvia on forward looking policy.
The initiative approved by Council of Latvijas Banka last week will enable non-bank payment service providers – payment and e-money institutions – and in the future also crypto-asset service providers to open an account with Latvijas Banka for the segregation of their customer funds. Likewise, Latvijas Banka will provide non-bank payment service providers with the possibility to directly participate in the Electronic Clearing System (EKS), thus facilitating the development of payment services in Latvia. These changes by itself makes Latvia much more attractive for financial technology companies and will serve as catalyst for future positioning of Latvia in finance world.
Successful adoption of the crypto-assets regulation would position Latvia as a financial innovation-friendly country at the European level, which in turn would attract foreign companies to do business in Latvia. Latvia has good human capital, stars of mathematics Olympiads and other young talent whose knowledge can be an excellent precondition for foreign companies to enter Latvia, and we can learn from our neighbors in creating infrastructure. Lithuania, for example, is one of the most active adapters of innovation in the financial sector and has been working on attracting new companies in the fintech sector for almost a decade. The results of our neighbors speak for themselves: the crypto exchange Binance (UAB Bifinity) was the fourth largest taxpayer in the country in 2022, ahead of all major commercial banks.
A study conducted by the University of Latvia projects that if Latvia becomes a crypto-friendly country, the average increase in the number of people employed in the sector could be 25% per year. In the best-case scenario, this would allow the country's economy to be boosted by 1 200-3 000 jobs within five years, while taxes paid in the fifth year could exceed EUR 20 million.
The same study predicts that, with a good regulatory framework and a positive regulator, Latvia would see the arrival of companies whose average can compete with those paid in the software and financial sectors. Highly skilled staff salaries could exceed the EUR 10 000 mark, while average salaries could be in the range from EUR 2 000 to EUR 3 000.
Next year will be decisive
Next year all EU Member States must adopt the MiCA Regulation thus European and foreign companies will look for the most attractive jurisdictions to settle and serve the whole EU market from there. This means that Latvia needs to develop the most user-friendly legislation and actively engage in dialogue with the Web3 industry.
The Association's proposals offer a way to invest relatively few resources to put the country on the radar of the industry's big players as an attractive destination to serve the European market. The fintech industry will continue to work together with the regulator and decision-makers to ensure that the opportunity to position Latvia as a modern fintech country is not missed.
