From FinTech to TechFin: The Regulatory Challenges of Data-Driven Finance

Financial technology (‘FinTech’) is transforming finance and challenging its regulation at an unprecedented rate. Two major trends stand out in the current period of FinTech development. The first is the speed of change driven by the commoditization of technology, Big Data analytics, machine learning and artificial intelligence. The second is the increasing number and variety of new entrants into the financial sector, including pre-existing technology and e-commerce companies. This paper considers the impact of these new entrants with their typically large pre-existing non-financial services customer bases. These firms (loosely termed ‘TechFins’) may be characterised by their capacity to leverage the data gathered in their primary business into financial services. In other words, TechFins represent an Uber moment in finance. This shift from financial intermediary (FinTech) to data intermediary (TechFin) raises implications for incumbent financial services firms, FinTech startups and regulators. This seachange calls for analysis to underpin regulatory approaches with a view to balancing the competing interests of innovation, development, financial stability and consumer protection.postprin

Sustainability, FinTech & Financial Inclusion

We argue financial technology (FinTech) is the key driver for financial inclusion, which in turn underlies sustainable balanced development, as embodied in the UN Sustainable Development Goals (SDGs). The full potential of FinTech to support the SDGs may be realized with a progressive approach to the development of underlying infrastructure to support digital financial transformation. Our research suggests that the best way to think about such a strategy is to focus on four primary pillars. The first pillar requires the building of digital identity, simplified account opening and e-KYC systems, supported by the second pillar of open interoperable electronic payments systems. The third pillar involves using the infrastructure of the first and second pillars to underpin electronic provision of government services and payments. The fourth pillar—design of digital financial markets and systems—supports broader access to finance and investment. Implementing the four pillars is a major journey for any economy, but one which has tremendous potential to transform not only finance but economies and societies, through FinTech, financial inclusion and sustainable balanced development

The ICO Gold Rush: It's a Scam, It's a Bubble, It's a Super Challenge for Regulators

Initial coin offerings typically use blockchain technology to offer tokens that confer some rights in return, most often, for cryptocurrency. They can be seen as effectively a conjunction of crowdfunding and blockchain. Based on a handselected database comprising more than a hundred ICOs we provide a taxonomy of ICOs to facilitate thinking clearly about them, analyse the various regulatory challenges they pose, and suggest the first steps regulators should consider in responding to them. At the moment, many ICOs are offered on the basis of utterly inadequate disclosure of information, and the decision to invest in them often cannot be the outcome of a rational calculus. Many of the hallmarks of a classic speculative bubble are present in many, but certainly not all, ICOs. At the same time, ICOs provide a new and innovative structure for raising funds to support new and innovative ideas and ventures, with the potential for aspects of the underlying structures to have an important impact on fundraising systems and structures in future.published_or_final_versio

Corporate technologies and the tech nirvana fallacy

This Article introduces the term Corporate Technologies (“CorpTech”) to refer to the use of distributed ledgers, smart contracts, Big Data analytics, artificial intelligence and machine learning in the corporate context and analyzes the impact of CorpTech on the future of corporate boards. We focus on the tech manifestation of agency problems within corporations and identify—after considering possible market, governance, and regulatory solutions—elements of a governance framework for the CorpTech age. In particular, we take on a prediction often found in the literature, namely that CorpTech has the potential to solve a number of corporate governance problems for good and even make boards of directors redundant. We argue that this claim is based on what we call the “tech nirvana fallacy,” or the tendency of comparing supposedly perfect machines with failure-prone humans. The inherent features of technology and corporate governance reveal that even well-programmed CorpTech leaves the core issue of corporate governance—conflicts of interest among the relevant corporate stakeholders—untouched. In the Corptech age, the key question becomes: “is the human being that selects or controls the firm’s tech conflicted?” If so, CorpTech itself will be tainted. In fact, the problems arising from the transition to a CorpTech-dominated governance environment may, in the short-term, make things even worse: insufficient understanding of the promise and perils of CorpTech and over-confidence therein may even aggravate agency problems within firms

The Distributed Liability of Distributed Ledgers: Legal Risks of Blockchain

University of Luxembourg Law Working Paper No. 007/2017Center for Business & Corporate Law (CBC) Working Paper 002/2017UNSW Law Research Paper No. 52The transformative potential of distributed ledger technology, especially in the financial sector, is attracting enormous interest. Many financial institutions are investing heavily in proof of concept demonstrations and the rollout of pilot applications of DLT technology. Part of the attraction of distributed ledger systems, such as Blockchain, lies in transcending law and regulation. From a technological perspective, DLT is generally seen as offering unbreakable security, immutability and unparalleled transparency, so law and regulation are seen as unnecessary. Yet while the law may be dull and the technology exciting, the impact of the law cannot be simply wished away. With data distributed among many ledgers, legal risk will remain. DLT projects may well be found, by courts, to constitute joint ventures with liability spread across all owners and operators of systems serving as distributed ledgers. Regulators seeking to support appropriate approaches to twenty-first century financial infrastructure must focus on these legal consequences

Blockchain Distributed Ledgers and Liability

One of the oft-noted benefits of distributed ledger technology is its security. Many commentators seem to believe that because the Bitcoin blockchain has not been hacked, somehow this means all blockchains are secure. This paper draws on recent examples to explore how risk persists when financial services are provided via distributed ledgers. We analyse the kinds of risk, how they arise and their possible legal consequences. While some technologists want to believe using blockchain will not give rise to legal liability, we demonstrate how this is not so. These liability consequences raise significant questions about how distributed ledgers should be structured, owned and, ultimately, regulated

Regulating Libra

Libra is the first private cryptocurrency with the potential to change the landscape of global payment and monetary systems. Due to the scale and reach provided by its affiliation with Facebook, the question is not whether, but how, to regulate it. This article introduces the Libra project and analyses the potential responses open to regulators worldwide. We conclude that perhaps the greatest impact will come not from Libra itself, but rather from reactions to it, particularly by other BigTechs, incumbent financial institutions and governments around the world

Decentralized finance

DeFi (‘decentralized finance’) has joined FinTech (‘financial technology’), RegTech (‘regulatory technology’), cryptocurrencies, and digital assets as one of the most discussed emerging technological evolutions in global finance. Yet little is really understood about its meaning, legal implications, and policy consequences. In this article we introduce DeFi, put DeFi in the context of the traditional financial economy, connect DeFi to open banking, and end with some policy considerations. We suggest that decentralization has the potential to undermine traditional forms of accountability and erode the effectiveness of traditional financial regulation and enforcement. At the same time, we find that where parts of the financial services value chain are decentralized, there will be a reconcentration in a different (but possibly less regulated, less visible, and less transparent) part of the value chain. DeFi regulation could, and should, focus on this reconcentrated portion of the value chain to ensure effective oversight and risk control. Rather than eliminating the need for regulation, in fact DeFi requires regulation in order to achieve its core objective of decentralization. Furthermore, DeFi potentially offers an opportunity for the development of an entirely new way to design regulation: the idea of ‘embedded regulation’. Regulatory approaches could be built into the design of DeFi, thus potentially decentralizing both finance and its regulation, in the ultimate expression of RegTech

Regulating a Revolution: From Regulatory Sandboxes to Smart Regulation

Center for Business and Corporate Law (CBC) Working Paper Series 001/2017European Banking Institute Working Paper Series 2017 - No. 11University of Luxembourg Law Working Paper No. 006/2017Prior to the Global Financial Crisis, financial innovation was viewed very positively, resulting in a laissez-faire, deregulatory approach to financial regulation. Since the Crisis the regulatory pendulum has swung to the other extreme. Post-Crisis regulation, plus rapid technological change, have spurred the development of financial technology companies (FinTechs). FinTechs and data-driven financial services providers profoundly challenge the current regulatory paradigm. Financial regulators are increasingly seeking to balance the traditional regulatory objectives of financial stability and consumer protection with promoting growth and innovation. The resulting regulatory innovations include technology (RegTech), regulatory sandboxes and special charters. This paper analyses possible new regulatory approaches, ranging from doing nothing (which spans being permissive to highly restrictive, depending on context), cautious permissiveness (on a case-by-case basis, or through special charters), structured experimentalism (such as sandboxes or piloting), and development of specific new regulatory frameworks. Building on this framework, we argue for a new regulatory approach, which incorporates these rebalanced objectives, and which we term ‘smart regulation’. Our new automated and proportionate regime builds on shared principles from a range of jurisdictions and supports innovation in financial markets. The fragmentation of market participants and the increased use of technology requires regulators to adopt a sequential reform process, starting with digitization, before building digitally-smart regulation. Our paper provides a roadmap for this process