1.1 The Aim of the Book
The identification of new market failures due to the combination of globalization, financialization and digitalization has led to the identification of new needs for regulating finance. Policymakers are becoming aware that new networks cross all jurisdictions, new dynamics move capital and new devices support business and affairs. Hence, new directions arise for both regulators and supervisors in order to improve market functioning, ensuring the smooth circulation of capital, and to ensure the protection of individual rights.
The scope of this research, then, refers to the phenomena that have been driven by deregulation and have resulted in the creation and diffusion of extremely structured and complex financial instruments. If, at first, all this may have favoured the development of the economy, it has also encouraged reckless behaviour, unsound management and unscrupulous speculation; and this comes at the risk of the reliability of trade, the stability of the entire financial sector and, as a result of contagion, the growth of the entire economic system.
Therefore, this research aims to identify the regulatory interventions that arise from the directions of policymakers and from understanding the effects of the oversight of the use of technology for improving banking and finance. Indeed, the investigation has a twofold orientation: on the one hand, towards the verification of the contents of the activities that exploit technology and, on the other hand, of the failures that such activities may incur (if carried out in the absence of appropriate corrective measures).
All the above serve to point out the core elements of fintech as a concept that refers to ânew business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial servicesâ (as FSB stated in 2019 in the document named âMonitoring of FinTechâ). It is worth anticipating that the link between finance and technology began many years before the rise of home banking, and certain experiences have been strictly regulated already in the twentieth century. However, the aforementioned scope considers the evolution of such a link towards an individualized, privatized, uncertain, flexible, vulnerable reality, in which a previously unexperienced freedom let the market participants to develop for new business models able to manage an increasing and shapeless set of relationships. Thus, the results of the analysis of the FSB (and the ones of other international organizations that will be examined below) represent a concrete starting point for identifying the implications of fintech innovations for both financial stability and individual rights.
In the course of past research, doubts had been repeatedly encountered and they, tenaciously avoiding a disciplinary solution, concerned the status of the technical-financial entrepreneurial condition of banks, financial intermediaries and alternative operators to them. These doubts were perhaps an anticipationâin a transitional phaseâof the issues that are addressed in this book with regard to the challenges of business coexistence in an automated environment. To date, the current regulatory framework has not come any closer to resolving this dilemma, but tends to regulate a period of interregnum: one of those moments in history when the ancient ways of acting no longer work, the rules of the past are no longer appropriate to the current conditions of the market, but more appropriate rules still have not been designed, written and implemented in order to ensure civil coexistence.
In defense of the regulator, however, it should be noted that even businessmen are struggling in this middle ground. Even more important is the conviction that, unlike in the past, the legislative bodies do not have a clear vision of the destination of finance, which cannot aim to support the current unsustainable model of society, economy, market and bank. In reality, it seems that these bodies can only react to the emergence of each new problem, in full experimentation, without expressing a clear political choice on the relevant matter.
It can be also warned that the power (i.e. the ability to act) has been separated from the politics (i.e. the ability to decide how and when to act), so that in addition to the doubts of âto doâ are those concerning the identification of the subjects responsible for the decision, the regulation and the supervision. Today, more so than in the past, the two terms of the regulatory problem, freedom and well-being, appear more than a dichotomy, a couple linked to the idea that the limitation of freedom to ensure social welfare is not an opponent but an effect of the same freedom: the democratic character of the growth to ensure an inclusive effect. If there is anything that makes it possible to distinguish the free market from the regulated market (and to order these in sequence), it is precisely the change in the purpose of public intervention. Thus, if in the recent past the heart of public intervention resided in the capacity of control/definition (of actions, risks and of the future), in the current phase of evolution of finance, the main concern should be not to prejudice development and instead to mitigate any risk of frustrating the unknown opportunities expected for the future.
1.2 The Technology, the Market and the Law
The purpose of this book is to provide a view of the role of the law in the technological environment, whose functioning is driven by rules encrypted in algorithms, software and any other provision used to set up any automation. This would change the way policymakers and programmers intervene on a number of important matters in the microeconomic sphere of individuals using high-tech devices and autonomous tools based on machine learning and artificial intelligence.
Most of the contents refer to the need for regulating technology, as the use of algorithms makes the foundation of reasoning visible: programmers and coders have written the logical sequence underlying the high-tech decision-making; hence, it is possible to predict how software will adopt a decision in front of certain inputs. This suggests new ways of regulation, more effective than the strategy based on the provision of incentive or disincentive (used for direct humansâ behaviour). Ahead of these hoped-for unknowable ways, the expectation concerns new regulatory and supervisory tools that add algorithms to the software used by market operators, projecting public intervention towards a coercive role that risks crushing innovation under the loss of slow-to-adapt public routines, not always in line with the speed of market operators.
As it is emphasized in the book, fintech distinguishes itself from finance because of its compulsive/obsessive modernization: as finance has looked for efficiency, fintech is looking for a solution aimed at reducing human effort; as risk has been a preliminary and temporary status (in the path towards a return), innovation is a step towards profit. Hence, this research analyses fintech as a movement towards a self-regulating system, able to overcome any possible perturbation by returning to an original state of maximization of well-being due to the ability to manage the asymmetry of probabilities.
Therefore, the technology as it has been proposed may be investigated as a support capable of ordering economic growth, bringing to mind the theories of nineteenth-century economists who called for a time when all human needs would be satisfied and growth replaced by a stable economy. Anyway, the arrival of technology is far from synchronized, as is the context in which it is applied and differentiated. This arises from the polycentrism of a market that is integrated by a relatively long and dispersed web of interdependencies, whose complexity refers to the evidence thatâwithin this marketâstates, the individuals and their fortunes are inextricably tied together. Hence, the application of new software architectures (including blockchain technology) is overcoming the standardization that has characterized the âmass marketâ, and the relations between companies/intermediaries and customers are projected beyond the multilateral exchange of this type of market (and, in the end, are taking as reference a âmass of marketsâ).
In this context, technology is the means that exploits the relations between ends and scarce means that have alternative uses; and it supports human choice and usage of such means. This makes the technology the object of law and economics studies, and it increases the interest for the effects of its innovations over the functioning of the market. Accordingly, the focus goes to the organizations and the processes that support the transformation of inputs into outputs, both as a rationale for the regulations and as the range of activities it influences. Thus, the book considers technology as both an input and an output, provided that its development can be carried out in a completely decentralized (i.e. cloudy) way by means of relationships between individuals.
This continuous evolution of relationships means that, in the fintech environment, relationships do not normally maintain their own structure, do not fix their own structure and do not fix flows. As fluidity may be a feature of fintech, the policymakers are called to understand the nature of the current evolution of the market for capital. They need to adopt a new approach when considering the regulatory intervention, as the interrelationships between the technological system and the legal system are extremely complex, and many of the effects of the high-tech developments are still too far off to predict. Hence, the policymakers cannot predict the future of financial evolution and they should not repeat the mistake of formulating utopian excogitations, but should enact the law to solve the issues due to the technological evolution and the difficulties that affect individuals in the wired economy. Indeed, this research will address problems that do not arise within the political and legislative system, but come from the market. In this context, fintechâconsidered the end of a long-lasting tendencyârequires an exogenous process of regulation to safeguard individual freedom within the globalized, financialized and digitalized society.
1.3 Innovation and Regulation
In recent years, the forms of capital circulation have expanded beyond the dynamics experienced during the twentieth century. Actually, the technological evolution has made possible the circulation of wealth through new types of systems (the so-called platforms), based on the possession of a compatible device, on the use of a software and on the access to an intangible network. In other words, through technological solutions, a platform allows for the execution of exchanges or the use of services that in the past were reserved to credit institutions, financial intermediaries, asset managers, insurance companies, and so on. After all, if the management of platforms were to be included among the non-reserved activities, an asymmetry (in terms of costs and safeguards) would be admitted and it would be difficult to justify with regard to effectiveness (of rights) and efficiency (of the market).
In this investigation, it is important to consider the interference between the provision of services and the management of the infrastructure supporting such provision; both are integrated in a digital complex that gives content to the system described above as a platform. This, of course, is a context thatâstill todayâneeds the safeguards provided by the system for the protection of savings, price stability and competition. The result is a specific significance of the technology with respect to the exercise of individual rights (of customers), and this must be taken into consideration by the regulator in order to ensure that the choice of a medium does not affect the public safeguards and backstops.
Therefore, it is necessary to start from the consideration that the diffusion of platforms broadens the scope of public intervention beyond the marks made during the twentieth century (during which the movement of capital was achieved through the intervention of an intermediary or the direct access to regulated trading venues, in a context that required compliance with standards of specific rigor). Indeed, in the context of a general use of information communication technology (ICT) tools and the affirmation of a âdigital single marketâ, intermediaries are faced with new types of competitive pressures due to the alternatives that are spreading in the financial industry and that induce market participants to overcome the concentration of relationships (for credit and debt), as it was the case in the bank-centred system or in the first experiences of the stock exchanges.
At an operational level, in fact, the book will explore the ways in which innovations allow the matching of supply and demand formulated by subjects in surplus with those of others in deficit, through alternative services to traditional intermediation. It is worth noting that, before the advent of the new economy, the capital market was characterized by static contents and by minimal interactivity (between companies and customers). Only in recent times, in fact, has the orientation of market participants gone towards the integration of mechanisms able to personalize the activity and the service and, in particular, to the systematic use of ICT tools for the management of the contents of the relative relationship (from the new infrastructures, to the new devices, to the new software).
The above feeds the interest of this research towards the current trend of banks to process automation and innovation in their information systems in order to improve their operational conditions: âfintech solutionsâ are now beginning to be commonly and widely used, by application of digital identification, mobile applications, cloud computing, big data analysis, artificial intelligence, blockchain and distributed ledger technologies.
From another point of view, the speed of application of the results of scientific research to the forms and methods of carrying out reserved activities must be considered equally significant. Devices and needs are becoming elements thatâas a result of technological innovationâdetermine the performance of activities that allow operators to do business in innovative ways (sometimes less expensive than traditional affairs). Thus, there is evidence of activities (i) alternative to the banking system (the -called shadow banking), (ii) instrumental to the latter (aimed at improving the use of traditional services, e.g. comparison website) or (iii) similar to banking (which should require a special authorization, e.g. fintech banks).
1.4 The Infinity of Data and the Software-to-Software Paradigm
Reasoning on data and big data, two modes of representation appearing in the law come to mind. The first is when a rule describes a case: it is a complete and enclosed form in which the legislator has represented all that has been known and that must be considered about a thing, a behaviour, a relationship. The other way is manifested when the legislator is not able to say who (and how many) were the subjects of the regulatory action, but it must be limited to an illustrative catalogue, which ideally leads to an etcetera.
There are lists and databases that have a practical purpose and are finished, such as the list of customers of a bank or the one of their operations; but there are others that want to suggest undeniable quantities and that stop uncompleted or grow to the limits of the indefinite. As this book and its anthology of rules show, technological innovations are infinitely rich in possibilities that can enrich lists with data circulating in the infosphere. Often they are aggregated data for the very taste of enumeration and tracking or, again, for the hope of bringing together elements without an apparently specific relationship, as happens in the so-called chaotic enumerations and as Alban William Phillips did in the twentieth century. However, this book does not only show that programmers have rarely analysed technology in its legal-economic implications, but it also highlights that the legal system should be able to direct the management of data in ways useful to society.
In this respect, the data is the economic goods and the unifying element of a decentralized set of algorithms and information: hence the analysis of the need for creating and defining property rights that would regulate the use of such valuable resource in the fintech environment. However, the technology makes such rights more exclusive and universal, as they would be cheaper to enforce by means of software (than it was in the traditional banking).
Traditionally, property rights have been correlated with scarcity, in order to avoid an extended use of a resource in a way that is not valuable; this leads to the appropriation. On the contrary, in the digital environment, property rights do not fulfill the same function, as the use of data does not prevent others from exploiting the same. Data is a resource that is valuable, but not scarce; it does not require an economizing intervention. Nevertheless, it is worth investigating the rules that would be able to maximize the social utility of data, enacting new rules for compensation, inhibition, and inalienability. Indeed, property rights help in controlling the flows of data, and allow for the remuneration of inventors and intermediaries: policymakers have to consider these features, and regulators have to try to minimize these problems. This refers also to secrecy figures in privacy law, whose limits will be shown in the book with respect to the inefficiency of the current mechanisms of information sharing: any user is selling himself/herself by remunerating his/her counter...