ZTLment becomes Europe's first regulated payments institution with the Danish FSA

"Blockchain is gaining traction in the financial field and the potential of the technology is widely recognised. However, with the use of new technology, new risks often also follow, and it can be difficult to determine how to handle services based on blockchain within the existing regulation." — DFSA

Together with ZTLment ApS (ZTLment), the Danish Financial Supervisory Authority (DFSA) has examined the use of the technology for a specific business model in the DFSA's regulatory sandbox, FT Lab. 

Blockchain allows for efficient settlement of payments 

ZTLment's solution facilitates payments with electronic money issued on blockchain. The solution differs from other payment services using the traditional payment infrastructure, which includes operators such as an acquirer, a financial institution and clearing and settlement systems. Many of these operators are not part of the ZTLment solution. Instead, the blockchain technically handles several of the roles filled by these operators in the traditional payment infrastructure. 

The FT Lab test shows that it is possible to make fast, secure and efficient payments on blockchain. The test also shows that blockchain-based payment services have the potential to compete with existing payment solutions that use the existing payment infrastructure. The DFSA expects that we will see several different types of financial business models using blockchain in the future. 

The test with ZTLment is a good example of how FT Lab enables the DFSA to gain further insight into how technology can help optimise existing business models.

"Using blockchain could potentially change the way financial services are offered, including how payments are settled. The DFSA works to explore and fulfil this potential in such a way that it is safe and efficient for Danish consumers and businesses to use", says Tobias Thygesen, who as head of the DFSA's Fintech, Payment Services and Governance Division is in charge of FT Lab, and continues:

"ZTLment's participation in FT Lab has given the DFSA a good insight into how blockchain can be used in practice to make payments. The DFSA and ZTLment have had a good and constructive process, where both parties learned about the potential and regulation of the technology", he says. 

Regulatory clarification

The majority of the test in FT Lab concerned regulatory clarification of ZTLment's business model. Payments with electronic money on blockchain are a new phenomenon, and the purpose of the test process was therefore also to assess how users are protected compared to traditional payment solutions. This is as far as the DFSA knows the first time that a supervisory authority in an EU Member State carries out this assessment based on a specific business model.

The DFSA assesses that blockchain is not covered by the Danish Payments Act (DPA) if it acts solely as payment infrastructure in connection with the provision of payment services. At the same time, the DFSA assesses that ZTLment's solution, based on blockchain, constitutes a payment service that requires authorisation from the DFSA. ZTLment has therefore submitted an application as a payment institution to the DFSA following the test. 

“We were in a regulatory grey area before this process. It is kryptonite when working with B2B transactions like we do. Therefore, it is a great relief that we have now gained clarity", says co-founder and CEO, Mads Stolberg-Larsen. 

Co-founder and CTO of ZTLment, Jason Spasovski, is impressed by the technical depth that was demonstrated by the DFSA during the process. "Several times I just had to note, 'yep, it's absolutely correctly understood', about complex technical functionality under the bonnet", he says.

"The big difference between now and 2017 is that financial regulators and central banks in Denmark and the rest of the world have a completely different curiosity about the technology. Basically, work is now being done on how payments on blockchain can create socio-economic value in a regulatorily sound way. Our test cycle with the DFSA demonstrates just that", adds Mads Stolberg-Larsen.

Tobias Thygesen concludes "It became clear during the test that blockchain can ensure very short settlement times and very low costs of payments. At the same time, it became clear that operators necessary for the delivery of traditional payment services do not necessarily appear in services based on decentralised infrastructure, of which the ZTLment solution is an example. For us, this is an indication that blockchain-based solutions can provide an effective alternative to existing solutions using the traditional payment infrastructure. However, it is a concern whether users of payment solutions based on blockchain technology in all cases enjoy the same level of protection under the DPA as when using traditional payment services where other regulated companies are part of the payment chain. We will therefore look into this.” 

To ensure that the learnings from the test benefit the market broadly, the Danish FSA has published a briefing on the DFSA's assessment of the use of blockchain to provide payment services. Read more here.