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FINTECH

Law and Regulation

JELENA MADIR

FinTech has developed rapidly in recent years, and with these developments new challenges arise, particularly for regulators: how do you apply current law to these ever-changing concepts in a world of continual technological advancement?
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EXTENDED CONTENTS

List of figures

List of tables

List of editor and contributors

Preface

Glossary of key terms

Table of cases

Table of legislation

1.   Introduction – what is FinTech?

      Jelena Madir

A. Introduction 1.01

B. What is (and isn’t) new about FinTech? 1.03

C. Key players, products and trends 1.08

1. Mobile payments and e-wallets 1.11

2. Open banking/APIs 1.13

3. Artificial intelligence (AI) and big data 1.19

4. Machine learning 1.21

5. Biometrics 1.22

6. Robo-advice 1.23

7. Blockchain 1.24

D. How should regulators respond and why should lawyers care about FinTech? 1.34   

1. Distributed ledgers and data privacy 1.36

2. Rules governing ownership and contractual rights and obligations 1.37

3. Regulatory sandboxes 1.39

4. RegTech 1.42

E. Conclusion 1.49

PART I     PAYMENTS, ALTERNATIVE FINANCING AND CRYPTOASSETS

2.   Adapting to a changing payments landscape

      Ben Regnard-Weinrabe and Jane Finlayson-Brown

A. Introduction 2.01

B. Online and mobile banking 2.03

C. Growth in contactless payments 2.11

D. PSD2 and regulatory technical standards on strong customer authentication and secure communication 2.19

1. Second EU Payment Services Directive (PSD2) 2.19   

2. Strong customer authentication 2.33

E. Open banking 2.48

1. Overview 2.48   

2. What is the aim of Open Banking? 2.53

3. What sparked this initiative? 2.54

4. Implementation of Open Banking 2.56

5. What are the potential advantages and disadvantages of Open Banking? 2.60

6. The global perspective 2.64

F. Payments and data protection 2.69

1. Overview 2.69

2. Consent, transparency and the legal basis for processing data 2.70

3. Purpose limitation: regulating the use of data 2.79

4. Security and accountability 2.83

G. Conclusion 2.92

3.   Crowdfunding

      Peter Chapman

A. Introduction 3.01

B. Forms of crowdfunding 3.05

1. Donation-based crowdfunding 3.06

2. Reward-based crowdfunding 3.08

3. Investment-based crowdfunding 3.11

4. Lending-based crowdfunding 3.14

5. Initial coin offerings and securities token offerings 3.15

C. Rationale for crowdfunding regulation 3.17

1. Should crowdfunding be regulated at all? 3.17

2. Is there a need for specific crowdfunding regulation? 3.21

3. The case for differing approaches to the different forms of crowdfunding 3.23

4. Regulation to achieve more efficient capital markets 3.25

D. Regulatory framework 3.28

1. Platform requirements 3.28

2. Investor protection and business conduct 3.52

3. Market integrity and financial crime 3.89

4. Market liquidity 3.93

E. Conclusion 3.98

4.   Cryptoassets and initial coin offerings

      Claude Brown, Tim Dolan and Karen Butler

A. Introduction 4.01

B. What are cryptoassets and initial coin offerings? 4.06

C. UK and Europe 4.17

1. Overview 4.17

2. Categorisation of cryptoassets 4.22

3. E-money and cryptoassets 4.24

4. Payment services and cryptoassets 4.30

5. Collective investment schemes and cryptoassets 4.36

6. Alternative investment funds and cryptoassets 4.47

7 Carrying on of a regulated activity 4.53

8. Registry, settlement and clearing 4.62

9. Future UK regulatory developments 4.65

D. United States 4.73

1. Overview 4.73

2. New York: the BitLicense regime 4.74

3. Other state cryptocurrency statutes 4.82

4. Commodity Futures and Trading Commission 4.83

5. Financial Crimes Enforcement Network 4.86

6. Securities and Exchange Commission 4.88

7. Other federal agencies 4.91

E. Asia 4.94

1. Overview 4.94

2. China 4.95

3. Thailand 4.97

4. Japan 4.99

5. Singapore 4.104

F. Conclusion 4.108

5.   Cryptocurrencies and central banks

      Hubert de Vauplane

A. Introduction 5.01

B. Characteristics of currency 5.04

C. Legal aspects of money 5.09

1. The role of the State 5.10

2. Legal tender and the discharging power of money 5.18

3. Convertibility and fiat currency 5.24

4. Fungibility 5.26

5. Bona fide holder 5.32

D. Legal differences between legal currencies and cryptocurrencies 5.36

1. What cryptocurrencies are and are not 5.37

2. Personal right or intangible property? 5.46

E. Legal issues related to cryptocurrencies 5.52

1. Characteristics of Central Bank Digital Currency 5.53

2. Specificities of CBDCs in comparison to paper money 5.57

3. Pseudonymity and traceability 5.59

4. Infringement and counterfeiting 5.62

5. Exchange control 5.64

F. Conclusion 5.66

PART II     BLOCKCHAIN AND DISTRIBUTED LEDGERS

6.   Blockchain in financial services

      Colleen Baker and Kevin Werbach

A. Introduction 6.01

B. Technology overview 6.04

1. Definitions 6.04

2. Key aspects of blockchain-based systems 6.10   

3. Potential benefits 6.16   

C. Blockchain applications in financial services 6.23

1. Customer data and identity management 6.24

2. The trade life cycle 6.28

3. Payments 6.38

4. Financing 6.40

5. Asset management 6.46

6. New currencies 6.48

7. Cryptoassets 6.51

8. Tokenisation 6.53

9. Insurance 6.56

10. Corporate governance 6.59

D. Regulatory and compliance considerations 6.61

E. Conclusion 6.68

7.   Smart contracts

      Jelena Madir

A. Introduction 7.01

B. What are smart contracts? 7.03

C. Automatability of contractual clauses 7.15

D. Different types of smart contracts 7.20

E. Existence of a valid and binding contract 7.22

1. Offer and acceptance 7.24

2. Consideration 7.30

3. Intention to create legal relations 7.31

4. Certainty of terms/essential terms 7.35

F. Capacity and authority 7.39

G. Form of agreement 7.41

H. Liability 7.47

I. Burden of proof 7.50

J. Governing law and dispute resolution mechanisms 7.52

K. Privacy issues 7.57

L. Contractual amendments 7.60

M. Conclusion 7.63

8.   Governing the blockchain: what is the applicable law?

      Harriet Territt

A. Introduction 8.01

B. Are national laws relevant to DLT systems? 8.03

C. Why governing law and jurisdiction matter 8.08

1. Governing law 8.08

2. Jurisdiction 8.19

D. Different aspects of blockchain governance 8.24

1. Agreements concluded via DLT systems 8.25

2. Assets created or stored on DLT systems 8.26   

3. Operation and management of DLT systems 8.27

E. Factors that may affect the applicable law 8.36

F. Conclusion 8.43

9.   Liabilities associated with distributed ledgers: a comparative analysis

      Dirk Zetzsche, Ross Buckley, Douglas Arner and Anton Didenko

A. Introduction 9.01

B. The distributed ledger concept 9.06

C. The risks of distributed ledgers 9.13

1. Ledger transparency risks 9.15

2. Cyber risks 9.19

3. Operational risks 9.25

D. Legal consequences 9.28

E. Consequences of joint control for liability 9.35

1. System participants as related entities 9.39

2. Liabilities arising from ‘shared control’ 9.42

F. Comparative analysis of potential liabilities 9.47

1. Contractual liability 9.49

2. Tortious liability 9.58

3. General partnership or joint venture 9.63   

4. Specific legislation 9.67

5. Fiduciary liability of core developers 9.70

6. ‘Liability cocoon’ of software developers 9.74

G. Conclusion 9.77

10.  Cybersecurity and blockchain

      Patricia L. de Miranda

A. Introduction 10.01

B. What is cybersecurity? 10.04

C. Cyber-attack case studies 10.06

1. The Ukraine cases: 2015 and 2017 10.11

2. The Maersk case: June 2017 10.19

3. WannaCry: May 2017 10.21

D. Lessons learned 10.23

E. Blockchain as a cybersecurity tool or blockchain as a risk? 10.35

F. Conclusion 10.54

11.  Blockchain and privacy

      Daniel Cooper and Gemma Nash

A. Introduction 11.01

B. EU data privacy law 11.07

1. The EU GDPR and its origins 11.07

2. Scope and core concepts 11.11

3. Key principles and rules 11.15

C. Data privacy and blockchain 11.17

1. Introduction 11.17

2. Blockchain and personal data 11.20

3. The immutable nature of blockchain 11.25

4. Decentralised networks and issues of responsibility 11.35

5. Other privacy challenges with blockchain 11.42

D. Conclusion 11.45

PART III     REGULATION AND COMPLIANCE

12.  RegTech and SupTech: the future of compliance

      John Ho Hee Jung

A. Introduction 12.01

B. Development of RegTech 12.06

C. Key players, drivers and applications in RegTech 12.16

1. Players and drivers 12.16

2. RegTech applications 12.23

D. Risks and challenges of RegTech adoption 12.27

1. Onerous procurement process 12.28

2. Preference for large and established providers 12.29

3. Fragmented market 12.30

4. Regulatory uncertainty 12.31

5. Concentration risk 12.32

6. Data protection security and cyber threats 12.34

E. Benefits, challenges and growth of SupTech 12.37

F. Future trends in RegTech and SupTech 12.42

1. Quantitative regulation 12.44

2. Machine-readable regulations 12.46

3. Agile regulation 12.47

4. Regulatory sandboxes 12.48

5. International cooperation 12.49

G. Future of compliance 12.51

H. Conclusion 12.55

13.  The rise of TechFins: regulatory challenges

      Dirk Zetzsche, Ross Buckley and Douglas Arner

A. Introduction 13.01

B. FinTechs and TechFins, digitisation and datafication 13.03

1. Features of FinTech and RegTech 13.03

2. Features of TechFin 13.04

3. TechFin stages 13.10

4. Over time the distinctions will disappear 13.15

C. New opportunities provided by TechFins 13.16

1. Reducing transaction costs 13.16

2. Improved business decisions and risk management 13.17

3. Financial inclusion 13.19

D. Financial law and regulatION challenges 13.24

1. Systemic issues and false predictions 13.24

2. Protected factors 13.26

3. Real power, unreal responsibility 13.29

4. Fiduciary status 13.35

5. Legal obligations 13.37

6. Fair competition 13.40

7. Differences from FinTech 13.42

E. Policy considerations 13.45

1. Costs of doing nothing 13.46

2. Costs of catch-all mandatory licensing 13.49

3. Other regulatory options 13.50

4. Data 13.53

5. Balanced risk analysis 13.55

6. Licensing requirements for data gathering and analytics 13.57

F. Conclusion 13.63

14.  Regulatory sandboxes

      Byungkwon Lim and Charles Low

A. Introduction 14.01

B. The regulatory sandbox in general 14.04

1. Covered FinTech products and eligible participants 14.06

2. Parameters 14.07

3. Regulatory safe harbour 14.09

4. Post-sandbox engagement 14.11

C. Benefits of the regulatory sandbox 14.14

1. Participant-regulator dialogue 14.14

2. Reduced time and cost of market penetration 14.15

3. Stronger appeal to stakeholders 14.18

4. Market signalling 14.20

D. Shortcomings of regulatory sandboxes 14.21

1. Multi-tiered regimes 14.21

2. Pre-judging innovative value 14.26

3. Scalability 14.29   

4. Race to the bottom 14.32

E. The FCA Sandbox 14.34

1. Admission into the FCA Sandbox 14.39

2. Reception of the FCA Sandbox 14.43

F. Regulatory sandboxes in the US 14.44

1. Federal-level experiment 14.44

2. State-level experiment 14.47

3. Regulatory sandbox implementation issues in the US 14.50

G. A global regulatory sandbox 14.56

H. Conclusion 14.61

15.  Compliance and whistleblowing: how technology will replace, empower and change whistleblowers

      Kieran Pender, Sofya Cherkasova and Anna Yamaoka-Enkerlin

A. Introduction 15.01

B. Technology replacing the whistleblower 15.06

1. The ‘openness revolution’ 15.07

2. Challenges 15.12

3. Opportunity 15.14

4. Obstacles 15.23

C. Technology empowering the whistleblower 15.28

1. Hotline services 15.29

2. Web portals 15.30

3. Mobile apps 15.36

4. Blockchain 15.38

D. Technology changing the whistleblower 15.48

1. Political implications 15.53

2. Ethical implications 15.54

3. Legal implications 15.57

E. Conclusion 15.66

16.  Regulation of robo-advisory services

      Lee Reiners

A. Introduction 16.01

B. What are robo-advisors? 16.03

C. Industry overview 16.06

D. Benefits of robo-advisors 16.09

E. Risks of robo-advisors 16.12

F. Regulation of robo-advisors in the US 16.17

1. Fiduciary duty for investment advisers 16.18

2. SEC guidance 16.26

3. Conflicts of interest 16.28

4. Examination 16.33

5. Responsibilities of robo-advisors registered as broker-dealers 16.34

6. Recommendations to change the regulatory framework 16.40

G. Regulation of robo-advisors in Europe 16.41

1. MiFID 16.42

2. National competent authorities 16.47

H. Conclusion 16.51

17.  Patentability of FinTech inventions

      Mirjana Stankovic

A. Introduction 17.01

B. Overview of the FinTech patent landscape 17.05

C. Patent eligibility of FinTech inventions 17.08

1. Types of FinTech inventions 17.10

2. Patent eligibility legislation and jurisprudence in the US 17.11

3. Patent eligibility rules: the European Patent Office perspective 17.18

4. Patent eligibility rules and the FinTech Fast Track initiative of the Intellectual Property Office of Singapore 17.25

D. Patenting of a FinTech technology: the case of blockchain 17.32

E. Conclusion 17.43

PART IV     TECHNOLOGICAL INNOVATIONS IN LEGAL SERVICES

18.  The innovation process in law firms

      Sophia Adams-Bhatti and Tara Chittenden

A. Introduction 18.01

B. Innovate or die? 18.08

C. Drivers for technological innovation in law firms 18.13

D. Barriers to technological innovation in law firms 18.26

E. The innovation process in action 18.35

1. Initiating innovation: ideas and insight 18.38

2. Seeking senior buy-in 18.43

3. Budget for innovation and expectations of a return on investment 18.45

4. Law firm incubators and dedicated space for innovation 18.51

F. Comparisons between LegalTech and FinTech 18.53

G. To innovation and beyond 18.57

H. Conclusion 18.62

19.  Future lawyers: how to stay up to date with the legal tech revolution

      Mark Fenwick, Wulf A. Kaal and Erik P.M. Vermeulen

A. Introduction 19.01

B. Education in a digital age 19.09

C. The lawyer of the future as ‘transaction engineer’ 19.16

D. LegalTech 19.28

E. Blockchain smart contracts 19.36

F. ‘Coding for lawyers’ 19.47

G. The cycle of self-learning 19.54

H. Conclusion 19.58

Index