We are always looking to identify good forums for keeping abreast of global fintech developments and trends. One such interesting platform was Cross-Border Fintech: Regulation & the Law 2019, held in London on June 6, where we heard some great insights into the current market trends in and the future of fintech. The conference was well attended, with representatives of many industry leaders, authorities, and industry bodies in attendance. The participation of many on the front lines of fintech from financial institutions, fintech startups, and industry bodies created a forum to share innovative ideas and trends that allowed participants—including us—to keep up with the latest innovation.
The first session covered innovations relating to cross-border payments, including an explanation of the use of distributed ledger technology to offer near real-time global payment exchange and settlement. Key challenges for payment service providers were identified, including the divergence in access to payment accounts and systems across jurisdictions and the differences in the implementation of the Payment Services Directive 2 across Europe. Notwithstanding these challenges, it is clear that the emergence of new ecosystems providing a more efficient banking and payment experience is disrupting the traditional banking platform, and that traditional financial institutions will have to adapt to a new marketplace.
A particularly interesting session with Ciaran McGonagle, assistant general counsel of the International Swaps and Derivatives Association, and Jelena Madir, chief counsel of the European Bank for Reconstruction and Development, looked at the use of smart contracts and the automation of the issuance of securities. While the “smarting” of contracts can lead to operational efficiencies, there are concerns that it may be difficult to customize smart contracts. The main challenge in this area is bridging the gulf between lawyers who understand the law (but not what technology can do for them) and technologists who understand the technology (but look for advice on aligning the technology with legal and regulatory requirements). Close collaboration between programmers and lawyers will be imperative for the coding of contracts without losing the meaning of their natural language. The extent to which the full lifecycle of contracts can be “smarted” remains to be seen, as it is likely that human discretion as to certain outcomes will always be needed, such as in relation to whether a termination is actually triggered. The UK Jurisdiction Taskforce is currently consulting on the legal treatment of smart contracts.
Another session flagged as a key concern for the industry the fast pace of regulatory change; for example, before a product is eventually finalized and offered to the market, it often needs a prediction of what the regulatory environment will be several years down the line. For instance, cryptocurrency exchanges and custodian wallet providers are due to be brought within the scope of regulation under the Fifth EU Money Laundering Directive, and the UK is consulting on whether additional activities, such as the issuance and distribution of new cryptoassets via initial coin offerings, should be brought within scope.
The difference in the regulatory treatment of cryptoassets across jurisdictions is especially challenging to fintech businesses operating across borders, and the Financial Stability Board recommended in a report last week that the G20 keep under review the topic of regulatory approaches and potential gaps, including the question of whether more coordination is needed. However, Elisabeth Noble, a senior policy advisor at the European Banking Authority, noted during the conference that regulatory sandboxes have proven as valuable bridges between the regulators and the industry.
The conference also addressed ways that technology is being used to assist with regulatory compliance, such as artificial intelligence being used to prevent anti-money laundering and fraud. It was particularly encouraging to learn from global banking representatives that they are collaborating with other banks, the Financial Conduct Authority, and the Bank of England in pushing forward digital regulatory reporting to make it easier for firms to meet their regulatory reporting requirements and improve the quality of information they provide. It was evident from the sessions that collaboration is required at all levels—between technologists and lawyers, between regulators and the industry, and between industry players and between regulators—for fintech to flourish, both domestically and globally.