Who’s Who Legal sits down with Willem Van De Wiele at White & Case to discuss issues facing banking lawyers and their clients in the industry today.
It is correct that we start to see increased interest in the actual implementation of blockchain technology. As the EU Parliament’s resolution on distributed ledger technologies (DLT) pointed out, “blockchain technology can improve transaction cost-efficiency by removing intermediaries and intermediation costs, as well as increasing transaction transparency, also reshaping value chains and improving organisational efficiency through trustworthy decentralisation”. It has the potential to make cumbersome processes quicker, cheaper and more transparent.
However, the quality of data remains important. Even if DLT is promoted as a “truth machine”, the use of the technology is not free from risk of error or fraud. Certain operational risks are starting to be further understood. In addition, some of the drawbacks, or even obstacles, to implementation are of a legal nature. The existing legal frameworks in various jurisdictions have not yet adapted to this new technology and while we see further guidance and new regulatory initiatives appearing, some important questions – eg, regarding the evidentiary value and data protection – have been raised.
In addition, the introduction of blockchain technologies presents a number of challenges. One is developing a viable business case, because while the advantages of the introduction of the technology in a particular field may be obvious, it is not necessarily clear how the costs of introducing the new technology will be borne, especially when there may be certain incumbent players that stand to lose from the introduction of the new technology. Coordination among market participants is also an important challenge. This gives rise to questions around interoperability and the tension between proprietary standards, intellectual property versus more open ecosystems, etc. If the use of blockchain technology becomes more widespread, this will also give rise to new antitrust questions.
The European Revised Directive on Payment Services (PSD2) is an innovative piece of European regulation aimed at creating a more “open banking system”.
Banks are required to give access to their payment infrastructure and client data to third parties (subject to a new regulatory framework, to protect consumers), allowing these third parties to offer innovative payment solutions to consumers. PSD2 is considered a particularly important piece of legislation, because “it goes beyond merely adding new elements to an existing framework but rather attempts to transform the sector by technology”. Benoît Georges Cœuré, member of the ECB board, stated:
The new Directive gives bank customers the right to share their account information with third parties and use them to initiate payments, while maintaining high standards of personal data and consumer protection. It opens up a level playing field where fintechs can grow, gain scale and leverage other parallel technical advances, some of them promoted and developed by the ECB.
The FinTech Action Plan states that the European Commission encourages and will support joint efforts by market players to develop, by mid-2019, standardised application programming interfaces that are compliant with PSD2 and the GDPR as a basis for a European open banking ecosystem that covers payments and other accounts.
There is clearly an increased use of AI technologies across all parts of society and the economy, and the financial sector is no exception in this respect. AI technologies are starting to have an impact on various aspects of the financial sector. Wealth and asset managers are investigating how they can use AI in the delivery of their services. “Robo advisers” are getting more and more attention. AI is also starting to play a role in the automation of repetitive tasks, credit scoring, and compliance and fraud detection. As recognised in the EU member states’ declaration of April 2018 on AI, AI gives rise to important socioeconomic challenges, such as the transformation of the labour market system and the need to modernise Europe’s education and training system. China is making heavy investments in AI. There is a clear challenge for the EU to boost its capacity in AI to remain competitive on a global scale. Countries such as France have recognised that the public sector can play an important role in this respect, eg, by stimulating the use of certain technologies and making data available.
The increasing use of AI triggers important legal and ethical questions. The EU member states recognise the need to ensure that an adequate legal framework is being put in place. There are important questions regarding the protection of privacy, as well as principles of transparency and accountability when algorithms are used. GDPR already introduces accountability requirements in connection with the use of algorithms, but expect this to remain a focus of attention for regulators and policymakers.
In the short term, I expect to see an increased focus on regulation and compliance. The fifth Anti-Money Laundering Directive introduces stricter rules in the EU (and actually brings EU legislation more in line with the US). More generally, across all jurisdictions, dealing with anti-money laundering risks will become more and more important. I also think the “wild west” of initial coin offerings (ICOs) is over, as demonstrated by the strong enforcement actions by the US regulators. These enforcement actions make clear that it is not possible to conduct ICOs outside the existing legal framework. In Europe, some jurisdictions, such as France, are introducing more flexible legal frameworks for certain ICO transactions. Some regulation has also been announced at EU level with respect to crypto-assets, but it remains to be seen what form this will take.
In terms of regulation in the longer term, a lot will depend on the developing links between the cryptocurrency markets and the economy as a whole. Expect prudential supervisors to continue to monitor this situation. The Financial Stability Board has indicated that, while in their view there is not yet an immediate risk to financial stability, the situation should be monitored, and if the use of cryptocurrencies continues to evolve, further action may be required, eg, to deal with the exposure financial institutions have, the impact on payment and settlement systems, etc. It is worth noting that the Swiss Financial Market Supervisory Authority has already, and quite recently, instructed banks dealing in crypto-assets to apply a risk weighting of eight times their market value when calculating loss-absorbing capital buffers.
It will be interesting to see, over the coming years, whether central banks and governments will start introducing their own “central bank”-backed digital currencies. The recent statements by Christine Lagarde of the International Monetary Fund are an indication that the interest from central banks and monetary authorities is real. A number of countries (such as Sweden, Canada, China) are considering the introduction of a digital currency. I think this will be a slow process. Undoubtedly it will raise interesting new questions eg, regarding privacy.
As with the introduction of any new technologies, there will be winners and losers. There may be over investment by certain companies and “wrong bets”. In my view, if we talk about a bubble, it would be especially in the context of ICOs. There have indeed been some projects that did not necessarily deliver in line with hopes and expectations. However, it is important to keep in mind that fintech is not just made up of new start-up companies and ICOs. It is about a more complex ecosystem, where certain existing financial institutions may be able to successfully transform their existing organisations, where new partnerships are emerging between incumbents and new players, and where new players will take on a prominent role. Technologies will continue to evolve, and expectations of retail and business consumers are changing. Also, I would expect, in certain countries and jurisdictions, a more proactive approach and heightened introduction of technology in the financial sector. Even following on from the “dotcom bubble”, the internet is here to stay, impacting the economy and society as a whole.