Overview and Outlook for Fintech in 2020
Technology continues to redefine our expectations in almost every area of our lives and shape the way we interact with the world. Although technology has been almost synonymous with financial services for more than half a century, the rapid acceleration of financial technology (fintech) developments in the last few years has dramatically altered the way we interact with traditional financial institutions, introduced us to new financial services providers and created new classes of financial products and services for consumption.
The beginning of a new decade provides legal practitioners a good opportunity to review recent developments and gain perspective on how and why the legal and regulatory landscape may change in the near future.
To start, fintech is complex. While it often offers simple and elegant solutions to problems that have plagued the traditional financial services industry, the solutions may also open the door to complicated legal, regulatory and jurisdictional issues.
These issues are exacerbated by the fact that fintech innovation (i) is not limited by geography and (ii) is not limited solely to regulated financial institutions (FI) or established technology companies. The marketplace is global; state and national borders are often meaningless. And, although traditional financial institutions and their technology partners continue to be vital players in fintech development, ready access to the necessary tools for creating fintech solutions has significantly lowered the barriers to entry. In fact, enterprising entrepreneurs often need little more than a computer, an internet connection and, sometimes, a bank account, to develop an innovative fintech application that can transfer value half way around the world in seconds, allows small dollar purchases of securities almost instantly, or writes a smart contract that facilitates peer-to-peer lending with no intermediary.
Moreover, fintech development is often a communal project, raising additional legal and, potentially, regulatory issues. FIs, like fintech companies, may independently develop fintech solutions, but increasingly they incubate young companies, set up joint ventures or simply buy the technology. FIs also collaborate with other FIs to develop fintech, establishing various types of legal relationships, including consortium arrangements. Where fintech solutions begin outside of the traditional, regulations banking system, FIs frequently partner or even acquire these companies, integrating them into their existing business models.
The nature of the fintech solution, location of the developers, whereabouts of the fintech company’s customers when using the fintech solution, relationship (or lack thereof) with a traditional financial institution, and a host of other factors can influence the legal and regulatory environment in which fintech companies operate. These complexities can leave fintech companies and their partners asking: What laws apply to me? How can I balance the need to move quickly against a regulatory process that often moves at a more deliberate pace? How will future legal and regulatory changes affect my ability to conduct business?
The question for lawyers and their clients as they survey fintech’s current legal and regulatory landscape and review the factors that are forcing changes in this landscape, is how these changes may ultimately impact the evolution and viability of fintech.
Regulators are engaged and wrestling with how best to regulate fintech
US regulators face the challenge of balancing traditional man-dates that dictate a measured response, against the demand of users for immediate answers and solutions. No regulator wants a fintech failure to result in the demise of a regulated entity or financial loss to consumers. At the same time, no regulator wants to be the ogre, denying consumers compelling benefits offered by the technology.
In many ways, Facebook’s June 2019 proposal to organise a foundation to issue Libra, a global currency backed by sovereign currencies and low risk government securities, served as a wake-up call for government officials and legislators in many countries. The proposal offered a potential way to solve many of the existing problems facing the delivery of financial services especially to the underbanked and unbanked. However, the reaction was overwhelmingly negative. Identified issues included the potential disruptive effect of the Libra on the ability of sovereign governments to control their own monetary policies and the continued ability of the USA to dominate the global financial system. Criminal abuse of the new currency and significant privacy concerns emerged almost immediately. Potential antitrust violations were asserted based on a perceived unfair competitive advantage over business not using Libra.
The reaction in many countries, including the USA, under-scored the extent to which a constructive discussion of both the positive and negative effects of fintech, and cryptocurrencies in particular, has been largely avoided for years. Indeed, more than a dozen years before Libra, a not dissimilar gold-backed digital currency that circulated globally was prosecuted by the US government which claimed at the time that digital currencies were the “wild west” of international remittances. Twelve years later, in the 2019 congressional hearings on Libra, members of Congress and regulators were still complaining about the wild west of digital currencies, demonstrating how little was known about that earlier case or learned in the interim. It was clear by 2008 that the proverbial genie was out of the bottle and was not going to be put back in.
A growing number of regulators and lawmakers in the USA and abroad have made significant progress on the issues. The conversation is maturing, and substantive policy discussions are underway. Pending in the US Congress are more than 20 pieces of legislation that address cryptocurrencies and/or blockchain technology. In several cases the proposals assign regulators to different classes of crypto-assets.
How these issues are addressed may have a broader impact on the future of fintech development. For example, one proposal that attempts to address Libra would ban large technology companies from financial services. In 1933, Congress decided to separate banking and commerce, in part to keep the fledgling telephone companies out of banking. That ban has never been revoked.
Commission (SEC) and the Commodity Futures Trading Commission (CFTC), and even in some states like New York and California. These regulators are meeting with both fintech and regulatory technology companies to learn about their solutions, answer questions, and even start to incorporate some of the technology into their regulatory processes such as surveillance, examination and enforcement.