Fintech

Tomorrow's world today. 

Fintech – or financial technology – refers to the use of technology to deliver financial services. This piece concerns the development of Fintech over the last decade and the regulatory measures governing it.

Alongside many innovative processes with applications to the commercial world, lies the ‘block-chain’. Start-ups, in their application of ‘block-chain’ technology to distributed ledger structures, have attracted work and investments from financial institutions and companies. They also currently compete with these traditional players to some extent in the payments market, where significant inroads appear to have been made as more companies choose to trade in alternative currencies like Bitcoin.

Block-chains work on a network like the Internet and are built on a hash which encrypts the information generated by a transaction. This hash is stored in a “block-header”. The first computer which successfully completes this hashing is financially rewarded. The same process takes place for subsequent transactions, and the block-header that results from this new transaction is then “chained” to the previous block-header, by incorporating information from the previous block-header into the subsequent one. The chaining of such block-headers creates a ledger distributed across the network, where the exchange of assets is recorded securely.

Hence, a critical issue concerning block-chain technology is security. This is especially so in a permission-less model (there are three models currently – this, the electronic central ledger that works like a normal central bank and the permissioned model). Anyone who has a computer can access this block-chain. Hence, the more people with access to the network, the higher the risk of malware transmission. If malware successfully breaches the encryption of data, data is no longer secure, compromising an important advantage of block-chains.

A balance, however, must be struck; excessive regulation regarding data security may limit the potential wide-spread application of block-chains. Rules such as the EU’s General Data Protection Regulation may interfere with the application of block-chains to multi-jurisdictional payment systems or even data-transfer, restricting the potential of block-chains to foster an integrated and globalized transactional system.

On the other hand, regulations governing the sharing of customer information, such as the EU Payment Services Directives, may be detrimental to the adoption of block-chains as information sharing may negate the advantages of a data-encrypted system, defeating the purpose of using block-chains as earlier mentioned.

It must be noted that regulation in the UK by the Financial Conduct Authority has been generally friendly to Fintech companies. Notably, the ‘sandbox’ scheme of the FCA’s Project Innovate allows companies to test products with temporary approval from the FCA. This is a scheme that has also been introduced or proposed in countries like Australia and Singapore. Ultimately, the aim is not to restrict financial technology, but to create a healthy regulatory environment that fosters innovation.

Essentially, regulation in the UK and other parts of the world purport to foster Fintech development, rather than limit it. Therefore, it appears then that the legal landscape surrounding it is generally well-adapted in response to this breath of fresh air that is Fintech.

This article was written by Wee Toh Loo (1st year, LLB Law), in conjunction with Dicta 2017.

Ben Lin