1
Introduction
Finance and technology have been central to human societies and economies since
the advent of settled human civilisations almost 10,000 years ago, and for almost as
long, efforts have been made to govern and regulate both.
While innovation has always affected finance, over the past 50 years, finance and
technology have evolved incredibly rapidly due to digitalisation. Digitalisation com-
bines processes of digitisation and datafication. Digitisation is the process of moving
data from physical (analogue) to electronic (digital) form, while datafication is the
process of deriving data from activities and analysing them, typically via a range of
information technologies, including artificial intelligence (AI). The resulting oppor-
tunities and risks are challenging the evolution of financial policy, governance, law,
and regulation domestically and internationally.
This book considers this ongoing evolution. In particular, we enquire into how
law and regulation can best balance the opportunities and risks of finance and
technology, and how finance and technology respond to advancing and expanding
financial regulation.
When in 2008 the financial world changed and the Global Financial Crisis
(GFC) plunged the world into the worst recession since the Great Depression, mil-
lions of people lost their homes, jobs, and life savings. Some of the unemployed
were financial services professionals. Young talented finance people with good
tech skills were looking for new opportunities, conventional credit sources were
contracting due to the Crisis and post-Crisis regulatory reforms, internet penetra-
tion was extensive in many markets, and the first widely successful smartphone, the
Apple iPhone, was launched in mid-2007. The scene was set for dramatic change in
finance. The result was a truly dramatic growth in the application of technology to
finance – known as FinTech.
Accordingly, when most people think of FinTech today they think of it start-
ing around 2008. However, we argue that FinTech is not new, because finance
and technology have always danced well together – technology has long assisted in
information provision which is (and always has been) crucial for financial decision-
making. Today, money is intangible. It moves in response to information that comes
1
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
2 Introduction
to us on computers and is directed via electronic systems. At the same time, techno-
logical innovation helps to overcome distances, both physical and temporal. This is
important in a world where financial markets are the most globalised segment of the
economy, and one of the largest investors in information technology (IT) systems
has long been the financial services industry, in its competitive race for new infor-
mation and speed.
We show that since the 1960s, finance has gone through a profound process of
digital transformation, involving digitisation and datafication and the creation of
massive amounts of digital infrastructure. Finance today is the most digitised, data-
fied, and, due to both its destructive and constructive potential, regulated sector in
developed societies.
FinTech, as we lay out in this book, is best understood as including four major
elements: first, global wholesale markets where digitisation means speed, crucial for
capitalising on information advantages; second, an explosion of financial technol-
ogy (FinTech) start-ups particularly since 2008 in the aftermath of the GFC seek-
ing regulatory lenience that was available to the small but not the large; third, the
unprecedented digital financial transformation in retail finance in an increasing
number of countries, most dramatically China and India; and fourth, the increasing
role of large technology companies (BigTechs) moving into financial services and
digital financial platforms.
The changes since 2008 have been unprecedented, particularly in terms of the
speed of technological evolution and emergence of new entrants, including start-
ups and BigTechs. These changes have brought greater financial inclusion and
efficiency and new risks. Regulators seek to maximise the former and ensure that
financial intermediaries well accommodate the latter.
This long-term process of digitisation and datafication of finance has been
increasingly combined over the past 15 years with a group of technologies com-
monly termed ‘ABCD’: Artificial Intelligence (A), Big Data (B), Cloud Computing
(C), and Distributed Ledger Technology (D). The latter typically uses blockchains
and makes possible the smart contracts that underpin cryptocurrencies and cen-
tral bank digital currencies. These technologies have together, on the one hand,
prompted the need for digital identification and, on the other hand, triggered the
extraordinary growth we have seen in use of technology for regulatory and supervi-
sory purposes: Regulatory Technologies (RegTech) and Supervisory Technologies
(SupTech).
We include all of these aspects of the revolution through which we are all living
in the rubric, FinTech. Its ambit is broad and extends from innovations with dis-
ruptive effects on existing intermediaries, such as crowdfunding and crowdlending
among many others, through to the entry into financial services of the BigTechs and
the existential threats they pose to traditional banks.
While this process of digitisation and datafication and emergence of new technol-
ogies extends across both developed and developing markets, the latter often display
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
Introduction 3
faster digital financial transformation because of the absence of legacy systems and
the demand driven by large-scale financial exclusion.
During the 2020s, factors beyond digitisation and datafication have driven this
revolution. The COVID-19 pandemic and its attendant lockdowns around the
world drove ever better presenceless payments and security measures. If the pan-
demic had struck a mere decade earlier, the then technology would have allowed
far fewer of us to work, shop, and communicate well from home. FinTech likewise
has been central in times of conflict and in our current sustainability crisis. Only a
digital financial system has the capacity and versatility to deal with the plethora of
objectives that regulators now impose on financial systems.
We consider the history, evolution, and scaffolding of ‘FinTech’ in Part I of this
book.
We commence in Chapter 2 by analysing the evolution of FinTech since 1865 in
four periods. The first period involved electrification and lasted for a century until
the mid-to-late 1960s. It was dominated by analogue processes and traditional banks.
The second period lasted 40 years and was marked by digitisation, including across
securities markets (NASDAQ), payments (ATMs and SWIFT), computerisation
(financial calculators and PCs), and mass communication (Internet and mobile).
From around 2007 onwards, a new period commenced which was driven by the
application of a range of new transformative technologies to finance, the impact
of the 2008 crisis on finance, and the massive concomitant increase in regulation.
These three driving forces underpinned the emergence of huge numbers of tech-
driven financial services start-ups commonly called ‘FinTechs’. This period lasted
just over 10 years and included a rapid rise in the algorithmic analysis of data that has
transformed finance. The fourth and most recent period commenced in 2020 driven
by the COVID pandemic and is characterised by the rise of new scale and impact in
technology, for instance with the emergence of large digital platforms, central bank
digital currencies and AI.
These ever-shortening time periods are no coincidence, for it is the nature of
technological change to build upon itself and thus be ever accelerating. The current
period may only last five years. It has been a wild ride so far, and only likely to get
faster and wilder.
In Chapter 3, we argue for smarter regulatory approaches and measures. Since
the 2008 GFC, financial regulation has increased dramatically in scope and scale.
Post-crisis regulation, plus rapid technological change, has spurred the develop-
ment of FinTech and RegTech firms and data-driven financial service providers.
Financial regulators increasingly seek to balance the traditional objectives of finan-
cial stability and consumer protection with promoting growth, innovation, and sus-
tainability. This chapter analyses possible new regulatory approaches, ranging from
doing nothing (which spans being permissive to highly restrictive, depending on
context), cautious permissiveness (on a case-by-case basis, or through special char-
ters), structured experimentalism (e.g., sandboxes or piloting), and development of
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
4 Introduction
specific new regulatory frameworks. We argue for a new balanced, risk-based, pro-
portionate approach that incorporates these rebalanced objectives, which we term
‘smart regulation’.
Chapter 4 considers the evolution of the use of technology for regulatory and
supervisory purposes: RegTech for short. RegTech is the use of technology, par-
ticularly IT, in monitoring, compliance and regulatory reporting by industry, and
in supervision and enforcement by regulators. The latter use by regulators is some-
times termed ‘SupTech’, which then narrows the ambit of the term RegTech to the
use by industry. Either way, for industry, regulators, and policymakers, the pace of
transformation in digital financial products and systems requires ever greater use of
RegTech. In this substantial sense, FinTech demands RegTech. While the princi-
pal regulatory objectives of financial stability, consumer protection, market integ-
rity, and support for growth and development remain, their attainment increasingly
requires the deployment of sophisticated technology by both reporting entities and
regulators. The increasing use of RegTech in turn enables a paradigm shift involv-
ing a reconceptualisation of financial regulation which we analyse.
Chapter 5 considers the impact of COVID and how the digital financial infra-
structure that emerged in the wake of the 2008 Crisis assisted to address the financial,
economic, and health challenges presented by the COVID-19 pandemic. While the
2008 Crisis was a financial crisis that impacted the real economy, COVID-19 was a
health and geopolitical crisis that impacted the real economy. Remarkably, during
the pandemic, the financial system proved to be highly resilient and, in fact, turned
from problem child to crisis response facilitator.
Chapter 6 analyses the drivers of the recent digital financial transformation as
the quest for (i) efficiency, (ii) financial inclusion, and (iii) sustainability. These
three factors are necessarily intertwined: financial inclusion underpins long-term-
oriented economies, and sustainability is required longer term for efficiency, and
vice versa. More efficient and innovative financial systems support responses to cri-
ses such as the COVID pandemic and enable financial inclusion and sustainable
development across the full range of the United Nations Sustainable Development
Goals (SDGs).
Having set the scene historically with a conceptual framework within which to
understand the FinTech Revolution, we then proceed to consider the breadth of
FinTech. We analyse its various elements, which taken together comprise nothing
less than a revolution in finance.
In Part II, we consider the major new technologies that characterise the FinTech
age. Chapter 7 addresses the use of AI and machine learning in finance. The chap-
ter develops a framework for understanding and addressing the increasing role of AI
in finance. It focuses on human responsibility as central to any solution to the AI
‘black box’ problem – which is the risk of undesirable results arising from people’s
difficulties in understanding the internal working of an AI or from an AI’s indepen-
dent operation outside human supervision or involvement.
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
Introduction 5
The next two chapters (Chapters 8 and 9) in Part II address distributed ledger
technology (DLT) and blockchain, and the evolution of decentralised finance
(DeFi) and embedded regulation.
In Chapter 8, we consider how DLTs and blockchain are contributing to the
creation of a new foundational infrastructure for financial services, including
crypto-assets and smart contracts. We classify the new business models, analyse the
opportunities, and highlight the regulatory challenges.
In Chapter 9, we analyse the meaning, legal implications, and policy conse-
quences of DeFi. Decentralisation has the potential to undermine traditional forms
of accountability and erode the effectiveness of traditional financial regulation and
enforcement. At the same time, where parts of financial services are decentralised,
there will be a reconcentration in a different (but possibly less regulated, less visible,
and less transparent) part of the financial services chain. DeFi regulation could and
should focus on this reconcentrated portion to ensure effective oversight and risk
control. Paradoxically, DeFi may well require regulation in order to achieve its core
objective of decentralisation. Furthermore, DeFi facilitates ‘embedded regulation’,
by allowing regulatory measures to be built into the decentralised infrastructure,
potentially decentralising both finance and its regulation in the ultimate expression
of RegTech.
Chapter 10 considers the role of data and data regulation. Against the background
of the big data age, this chapter explores the relationship between data and financial
regulation in four major jurisdictions: the EU, the United States, China, and India.
We argue that data regulation provides a crucial foundation upon which FinTech
infrastructure is designed, built, and operated. Data regulation thus profoundly
shapes the emergence of FinTech ecosystems. For FinTech, data regulation is a
new form of financial regulation.
Chapter 11 presents a framework for a balanced proportional approach to sup-
porting innovation, focusing on the role of innovation hubs and regulatory sand-
boxes. This chapter argues that innovation hubs provide most of the benefits that
the policy discussion associates with regulatory sandboxes, while avoiding most of
the downsides of formal regulatory sandboxes. Consequently, we argue, regulators
should focus their resources on developing effective innovation hubs, including, in
appropriate cases, a sandbox as part of the hub.
In Part III, we move from the questions around new technologies to the strate-
gies for building better financial systems, focusing on the role of digital financial
infrastructure, so as to allow societies to capitalise on the true potential of FinTech.
Chapter 12 explores the infrastructure for digital financial transformation and sug-
gests it be built on four primary pillars. The first pillar comprises digital identity,
simplified account opening, and e-KYC systems. The second is open interoperable
electronic payment systems. The third involves the electronic provision of government
services and payments. The fourth is the design and development of digital financial
markets and systems, which supports broader access to finance and investment.
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
6 Introduction
Chapter 13 focuses on the role of digital identity as a core enabling infrastructure
and explores the various requirements for identification in the financial sector and
the evolving nature of identity. We argue that technology enables the solution of
the identity challenge through the development of digital identity infrastructure and
related identity utilities. The establishment of such utilities for digital or electronic
identification requires addressing design questions, such as registration methods,
data availability, and cross-jurisdictional recognition, and offers massive efficiencies
to financial services.
Chapter 14 explores the digital transformation of payments and the emergence
of cryptocurrencies, stablecoins, and central bank digital currencies (‘CBDCs’). In
the future, we expect domestic money and payment systems to involve public cen-
tral banks cooperating with (old and possibly new) private entities, including com-
mercial banks, to launch digital currencies which will underpin profoundly better
monetary and payment systems at both domestic and international levels.
Chapter 15 highlights the experience of the European Union in bringing these
elements together to support digital financial transformation. Europe’s path to digi-
tisation and datafication in finance has rested upon four apparently unrelated pil-
lars: (1) extensive reporting requirements imposed after the GFC to control systemic
risk and change financial sector behaviour; (2) strict data protection rules; (3) the
facilitation of open banking to enhance competition in banking and particularly
payments; and (4) a legislative framework for digital identification imposed to fur-
ther the European Single Market. We suggest that together these seemingly unre-
lated pillars have driven a transition to data-driven finance. The EU experiences
provide insights for other countries in developing regulatory approaches to the inter-
section of data, finance, and technology.
Part IV then focuses on the risks of FinTech, which we term ‘TechRisk’. It
explores the risks to competition that arise because both finance and technology
industries tend towards winner-takes-all outcomes and the other risks that increasing
dependence upon technology brings.
Chapter 16 highlights the emergence of a range of new platforms that are transform-
ing finance far more than have the FinTech start-ups which characterised the 2010s.
These massive data companies moving into financial services we refer to as ‘TechFins’.
China has led this change, with Alibaba establishing the online financial conglomer-
ate Ant Group. The chapter also considers the emergence of digital finance platforms
and the entry of BigTech firms (the tech behemoths Microsoft, Apple, Google, Meta,
and Amazon) into finance. These changes are a natural outcome of the economies of
scope and scale that characterise finance combined with the network effects of data
and technology. These major trends are at the heart of the current era of FinTech and
bring the major risks we explore in Chapters 17, 18, and 19.
Chapter 17 provides a framework to understand the emerging risks in digital
finance, and in particular, we focus upon systemic, cybersecurity risks and privacy
risks.
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
Introduction 7
Chapter 18 considers the emergence of new systemically important financial
institutions (SIFIs) and financial market infrastructures, and the risks that this brings
and how best to regulate these SIFIs, many of which will not trigger the traditional
thresholds of financial regulation.
Chapter 19 analyses platformisation, one of the trends transforming finance, with
examples including the rise of Ant Financial in China’s financial landscape and of
Blackrock’s Aladdin in the US mutual funds industry. This chapter considers how to
regulate these emerging massive digital finance platforms in the light of their impact
on financial regulation objectives, competition, and innovation.
Our analysis then concludes in Chapter 20, in which we argue that contemporary
digital finance, which emerged from the crisis of 2008, has become a crisis impact
mitigation tool able to assist in dealing with the plethora of challenges and crises
mankind is facing, be they wars, a pandemic, or the climate-related sustainability
crisis. Better financial systems may not only promote efficiency and stability but also
support resilience in future crises whatever their source.
We argue that the digitisation of finance has been central to the positive contri-
butions of today’s financial systems. To ensure our financial systems continue as a
force for good, financial regulation must simultaneously pursue the objectives of
efficiency, resilience, inclusion, innovation, and sustainable development. This is
particularly challenging because the rise of the TechFins and of digital financial
platforms means two of the major players in contemporary finance will often be
systemically significant without activating the traditional triggers for financial regu-
lation – and thus will lie outside the purview of financial regulation. This is the core
challenge facing financial regulation globally today. Digital finance, well regulated,
will be essential to respond well to the increasing range of crises likely in coming
decades. To realise this potential, FinTech and digital finance require a fundamen-
tal readjustment of approaches to the regulation of finance and technology. How
this may be brought about is the subject of this book.
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
https://doi.org/10.1017/9781009086943.001 Published online by Cambridge University Press
