What is old is new
With the excitement surrounding the potential for financial technology to change the world and transform lives in recent years, it’s worth remembering that financial innovation has been with us for a while. From the invention of money before the beginning of written history to the use of the double-entry bookkeeping method in Korea during the Goryeo dynasty and its adoption by the Medici family in the 14th century, fintech has come a long way.
However, in recent years it has been difficult to open a newspaper (or a news aggregator) without reading about the promise of artificial intelligence, distributed ledger technology, cloud computing and ever-cheaper computing power.
Combined with the creation of new business models, the increasing democratization of technical education, significant investment and public policy and regulatory support, the fintech sector has experienced remarkable growth. There has never been a better time to be a fintech-focused entrepreneur, financier, investor, decision-maker, technologist or (whisper it quietly) lawyer.
A broad church
You know fintech has penetrated the public consciousness when the portmanteau enters the dictionary for the first time. Merriam Webster defined fintech as “products and companies that use newly developed digital and web-based technologies in the banking and financial services industry”. It should be clear from this definition that fintech is a broad church. It encompasses businesses of all sizes, from the founder writing the first lines of code to some of the largest and most valuable companies in the world. It also encompasses a wide range of technologies and business models. Fintech products and services are now found across the entire financial sector, including:
- payment processing and networking;
- crypto assets;
- mobile wallets and money transfers;
- retail investments and secondary markets;
- capital markets and institutional trading;
- core banking and infrastructure;
- asset management;
- personal finance and savings;
- digital banking;
- lending and investment in real estate;
- financial regulation and compliance;
- insurance;
- wages and benefits;
- credit scores and analyses; and
- personal and business loans.
Although there are significant differences between the legal issues affecting businesses operating across this diverse universe of sub-sectors, this publication seeks to address the most pressing issues we see in our daily practice, and advise firms in all these areas .
Regulatory headwinds and CDBCs
For a relatively young industry that until recently has only had a largely supportive regulatory and policy environment and enthusiastic investors, there has been a marked shift in the direction of the prevailing winds surrounding the fintech sector over the past 12 to 18 months.
Some fintech companies and products are now of sufficient scale and importance that they have the ability to affect a significant number of consumers and potentially even cause systemic risk to the financial system. This has caused a marked shift in the attitude of many policy makers and regulators to the level of support given to, and their oversight of, fintech companies. In no area is this more evident than in the world of cryptoassets, where regulators around the world are grappling with how best to regulate the ever-growing mosaic of businesses operating in the cryptoasset space. Ironically, this tightening of the regulatory perimeter around cryptoassets coincides with a marked increase in the level of activity around the world, from governments and central banks, which are exploring how they can leverage the same distributed ledger technology to launch their own central bank digital currencies (CDBCs ), or renew their wholesale payment systems. The Bank of International Settlements (often referred to as the central bank of central banks) reported in June 2022 that nine out of 10 of the central banks it surveyed around the world confirmed that they were investigating the use of CDBCs.
However, crypto-asset firms are by no means the only fintech companies experiencing regulatory headwinds. Companies that offer buy-now, pay-later credit products to consumers are increasingly under scrutiny in many jurisdictions, as are many other high-growth companies operating in other verticals that are now subject to increasing regulatory scrutiny as they reach the scale at which their businesses begin to have a significant effect on consumers.
In all of these areas, businesses need to understand how they may be affected by the changes in the nature of the legal and regulatory controls to which they are subject.
Fintech 2023
This publication is intended to provide a user-friendly resource to help fintech entrepreneurs and their advisors and investors around the world navigate the often complex important legal and regulatory issues on which we are most often asked to advise.
Now, more than ever, understanding the legal and regulatory landscape you operate in is critical to success. We hope this edition serves as a valuable reference point wherever you are on your fintech journey.
