Cross Border Regulation Fintech Agreement

Cross-border regulation and
Downloaded from https://academic.oup.com/ulr/article-abstract/24/2/367/5520730 by Adam Ellsworth, Adam Ellsworth on 21 August 2019

fintech: are transnational
cooperation agreements the
right way to go?
Petja Ivanova*
Abstract
In light of inevitable cross-border scenarios in today’s highly interconnected financial
markets and since financial stability may be put at risk by the rising phenomenon of
financial technology (known as fintech), the importance of developing effective ways
to regulate fintech across borders cannot be neglected. The financial sector has
changed from a traditional one marked by conventional financial intermediation
structures towards an increasingly technology-affected one. Not only this change but
anticipated developments too require if not extensively reconsidering the design of
financial regulation,1 then at least not turning a blind eye to shaping developments.
Whether the numerous recently sprouting bilateral fintech cooperation agreements
are adequate transnational regulatory instruments to address fintech effectively across
borders is for this paper to elucidate.
I. Introduction
disruption [mass noun]
Disturbance or problems which interrupt an event, activity, or process.2
* Petja Ivanova, First state examination/Mag. iur., Heidelberg (Germany); Doctoral Candidate,
Institute for Comparative Law, Conflict of Laws and International Business Law, Heidelberg
University, Email: ivanova@ipr.uni-heidelberg.de; Member, Young Researchers Group of the
European Banking Institute, Frankfurt am Main (Germany). This contribution is an extended
version of the author’s presentation ‘Regulation and Fintech’ at the 10th Transnational
Commercial Law (TCL) Teachers Conference on Transnational Commercial Law and
Technology, 18–19 October 2018, Universidad Carlos III de Madrid.
1
As demanded by, e.g., L. Bromberg/A. Godwin/I. Ramsay, ‘Cross-Border Cooperation in Financial
Regulation Crossing the Fintech Bridge’, 13 Capital Markets Law Journal (2018), 59, available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3105141, at 1; W. Magnuson, ‘Regulating
Fintech’, 71 Vanderbilt Law Review (2018), 1167, 1187, calling for a broad reassessment of the
adequacy of current financial regulatory mechanisms and a wider-ranging reconceptualization of
financial regulation in today’s area of technology-enabled finance; further A. Didenko, ‘Regulating
FinTech: Lessons from Africa’, 19 San Diego Int’l Law Journal (2018), 321, pointing to the calls for
a fundamental over-haul of financial regulation.
2
See this definition at https://en.oxforddictionaries.com/definition/disruption.
! The Author(s) (2019). Published by Oxford University Press on behalf of UNIDROIT.

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Unif. L. Rev., Vol. 24, 2019, 367–395

doi:10.1093/ulr/unz021
Advance Access publication: 19 June 2019
368 Petja Ivanova
The risk of disruption, formerly attributed to traditional large financial insti-

tutions, such as banks,3 can also be ascribed these days to the almost countless
rather small widespread financial technology (fintech) businesses. Fintech’s

disruptive effects4 cause minor and major challenges that not only national,
but also international, regulations must face. Compared to conventional finan-
cial intermediation, the sphere of fintech might still be relatively small and, in
contrast to the USA and China,5 particularly in the European Union (EU), the
spread of fintech is not considerable, except for in the United Kingdon (UK),
which shows greater development.6 However, regulating financial firms, ser-
vices, and markets no longer means dealing only with traditional financial
institutions that offer conventional financial products and services but also
addressing the area of fintech. Taking up the goal of the transparent, respon-
sive, and effective cross-border regulation of the emerging fintech industry, this
article points the lens at a recent trend in regulating fintech by entering into
bilateral cooperation agreements. In order to set the course for discussing how
this transnational regulatory approach fits in with financial regulation, as a first
step, the subject of regulation is put in concrete terms (see subpart II.1).
Second, fintech and regulation are bridged by enlarging upon the meaning of
financial regulation and zooming in on the role of transnational cooperation
and coordination (see subpart II. 2.A). Subsequently, the need for considering
fintech in transnational regulatory concepts is illustrated, including challenges
and opportunities for fintech regulation (see subpart II.2.B). On this basis, the
article dives into the approach of bilateral fintech cooperation agreements (see
subpart III.2.A). First, it examines their content and the key elements of regu-
latory assistance (see subpart III.1.B). Then it commits itself to an assessment of
the role of bilateral cooperation agreements in financial regulation and their
implications (see subpart III.2.A) and possible improvements to cross-border
cooperation and fintech regulation (see subpart III.2.B). Some concluding
thoughts are provided at the end (see part IV).
3
Th. F. Huertas, ‘Safe to Fail. How Resolution Will Revolutionise Banking’ (London 2014), 4,
referring to the failure of global systemically important financial institutions (G-SIFIs) that
could disrupt financial markets and damage world economy.
4
Along with others, S. Andresen (former Secretary General, Financial Stability Board (FSB)),
‘Regulatory and Supervisory Issues from FinTech’ (29 June 2017), http://www.fsb.org/wp-con-
tent/uploads/Cambridge-Centre-for-Alternative-Finance-Regulatory-and-Supervisory-Issues-
from-FinTech.pdf, 1, speaks of transforming financial services rather than of disrupting. On the
principle of disruptive innovations, e.g., Th. Söbbing, ‘FinTechs: Rechtliche Herausforderungen
bei den Finanztechnologien der Zukunft’, 9 Zeitschrift für Bank- und Kapitalmarktrecht (2016),
360, 361.
5
See on fintech in China, for instance, X. Xiang/Zh. Lina/W. Yun/H. Chengxuan, ‘China’s Path to
FinTech Development’, 2 European Economy: Banks, Regulation and the Real Sector (2017),
143–59.
6
Cf. M. Demertzis/S. Merler/G. B. Wolff, ‘Capital Markets Union and the Fintech Opportunity’, 4
Journal of Financial Regulation (2018), 157, 159; X. Vives, ‘The Impact of Fintech on Banking’, 2
European Economy: Banks, Regulation and the Real Sector (2017), 97, 98.
Unif. L. Rev., Vol. 24, 2019, 367–395

Cross-border regulation and fintech 369
II. Setting the scene

1. Conceptual understanding of fintech

Before dwelling on the regulatory approach of transnational fintech cooperation
agreements, the subject of regulation should be set out.
A. Defining fintech
A definition of fintech that is universally recognized does not exist as yet, which is
not surprising. Defining fintech conclusively seems to be hardly feasible—not
least because it represents a collective term covering multiple different business
models and segments more than comprising one single notion. To avoid confu-
sion, in the first instance, the term ‘fintech’ should not be used interchangeably
with its subsets ‘insurtech’7 and ‘regtech’.8 For reasons of scope, the latter two will
not be addressed further herein. Without enlarging upon the historical evolution
of technology in the financial landscape,9 fintech today, in the broadest sense, can
be described as any use of innovative information technology in financial ser-
vices.10 This definition follows a functional approach by concentrating on the
subject matter of providing services based on technology-enabled innovations.11
By contrast, it does not take an institutional perspective to qualify the entities that
implement fintech—that is to say, those start-ups that offer special, customer-
oriented financial services that use innovative technologies.12 The relatively wide
functional definition can encompass not only such young fintech firms that offer
7
Insurtech refers to the use of technological innovations in the area of insurance businesses, in
detail, e.g., Ph. Rosenauer, in U. Klebeck/G. Dobrauz, Rechtshandbuch Digitale
Finanzdienstleistungen: FinTechs, Mobile Payment, Crowdfunding, Blockchain, Kryptowährungen,
ICOs, Robo-Advice (Munich 2018), Chapter 8, 483 et seq.
8
Regtech does not focus on providing individual consumers with financial services but on the use of
new technologies to solve regulatory and compliance requirements more effectively and cost effi-
ciently, see X. Vives (n 6), 104, esp. n 56; K.A. Schaffelhuber, in D. Kunschke/K.A. Schaffelhuber,
FinTech, Grundlagen – Regulierung – Finanzierung – Case Studies (Berlin 2018), 16, paras. 3, 5; D.W.
Arner/D.A. Zetsche/R.P. Buckley/J.N. Barberis, ‘FinTech and RegTech: Enabling Innovation While
Preserving Financial Stability’, 47 Georgetown Journal of Int’l Affairs (2017), 48, 52; D.W. Arner/J.N.
Barberis/R.P. Buckley, ‘FinTech, RegTech, and the Reconceptualization of Financial Regulation’, 37
Northwestern Journal of Int’l Law & Business (2017), 371–414.
9
For a historical insight, for instance, D.W. Arner/J. Barberis/R.P. Buckley, ‘The evolution of
Fintech: A New-Post-Crisis Paradigm’, 47 Georgetown Journal of Int’l Law (2016), 1271–1319.
10
M. Demertzis et al. (n 6), 157, 158; K.A. Schaffelhuber, in (n 8), 15, para. 1; W. Magnuson (n 1),
1174, who lists references for alternative definitions in n 16; Cf. A. Didenko (n 1), 317, 318,
pointing out some of the different approaches to defining fintech and their deficiencies.
According to the European Commission (EC) fintech refers to technology-enabled innovation
in financial services and does not only spur new business models, applications and processes but
has a transformative effect on financial markets and institutions and on the provision of financial
services as a whole, see FAQ: FinTech Action Plan (8 March 2018), <http://europa.eu/rapid/press-
release_MEMO-18-1406_en.htm?-locale=en>.
11
Cf. S. Omlor, ‘FinTech: Versuch einer begrifflichen und rechtssystematischen Einordnung’, 3
Juristische Schulung (Sonderheft FinTech) 2019, 306, who underlines that defining fintech
from a functional point of view better serves the needs of civil law than taking an institutional
definition (see n 12 hereinafter) as a basis.
12
Such an approach, however, is common supervisory practice, see, e.g., the definition by the
German Federal Financial Supervisory Authority (‘BaFin’), available under https://www.bafin.
de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2016/fa_bj_1609_fintechs.html.
Rev. dr. unif., Vol. 24, 2019, 367–395

370 Petja Ivanova
their products and services to customers first hand without referring to inter-
mediate bodies;13 banks and other incumbent financial institutions could be ad-
dressed as well since they can either develop innovative technologies in house or

make use of innovations introduced by fintech start-ups by means of takeovers,
for instance. Referring to the functional fintech definition, it is difficult to draw a
line clearly between these two types of financial actors to whom fintech activities
could be assigned. Hence, for the purposes of this article,14 the term ‘fintech’
denotes only the companies that run a fintech business by performing fintech
activities independently from other financial institutions.
B. Main areas of fintech activities

Classifying fintech companies rigorously seems to be rather illusionary in light of
the more and more convergent financial services they offer.15 And, yet, at least the
main segments of fintech should be described in order to illustrate the dimension
of the subject in need of regulation and to reasonably address the same. Since it
would be beyond the scope of this article to thoroughly analyse all of the rather
complex fintech areas, the following section only briefly marks the main fintech
activities without claiming to go into detail.
(i) Virtual currencies

One fundamental fintech phenomenon is the rise of virtual currencies, also
known as crypto-currencies.16 Launched in 2009, bitcoin made the start and
was rapidly followed by many other virtual currencies.17 The term ‘virtual cur-
rency’ can generally refer to privately issued and controlled digital money18 that
has a decentralized structure and is electronically generated and stored as well as
being neither legitimized by a governmental authority nor subjected to
13
W. Magnuson (n 1), 1174, who refers to the new breed of companies that specialize in providing
financial services through technologically enabled online platforms illustrates the contrast to
previous technological innovations that used to focus on providing established financial firms
with financial services; Cf. S. Omlor (n 11), 306. On the disintermediation, e.g., Ch. Brummer/D.
Gorfine, ‘FinTech: Building a 21st-Century Regulator’s Toolkit’ (Center for Financial Markets,
Milken Institute, October 2014), available at https://assets1b.milkeninstitute.org/assets/
Publication/Viewpoint/PDF/3.14-FinTech-Reg-Toolkit-NEW.pdf, 5.
14
The bilateral fintech cooperation agreements that are herein discussed address so-called
‘Innovator-Businesses’, see n 129 below.
15
Cf. Ch. Brummer/D. Gorfine (n 13), 2.
16
If cryptocurrencies should be equated with virtual currencies or rather characterized as a subset of
the latter (so, e.g., the ECB and the IMF, see European Parliament’s Committee on Economic and
Monetary Affairs, ‘Virtual Currencies – Monetary Dialogue’, July 2018, available at <http://www.
europarl.europa.eu/cmsdata/149902/KIEL_FINAL%20publication.pdf>) can be left open herein.
17
So, for instance, Litecoin (established in 2011), Dash (in 2014), Ether implemented by the decen-
tralized platform Ethereum that was launched in 2015 or Zcash (in 2016), to name only a very few.
18
It should be kept in mind that it is controversial and in light of today’s globalized interconnected
markets open to question if cryptocurrencies can be considered as money or currencies in the
conventional sense. Even if the traits of cryptocurrencies seem to speak in favour of deeming them
money, a universally accepted classification does not exist. At the 10th TCL Teachers Conference,
Caroline Kleiner (Professor, Université de Strasbourg) enlarged upon the question
‘Cryptocurrencies as transnational currencies?’ by, inter alia, examining if stateless money is a
real novelty and if cryptocurrencies illustrate the institutional theory of money.
Unif. L. Rev., Vol. 24, 2019, 367–395

compulsory acceptance.19 The European Anti-Money Laundering Directive de-

fines virtual currencies as:
a digital representation of value that is not issued or guaranteed by a central bank or a

public authority, is not necessarily attached to a legally established currency and does
not possess a legal status of currency or money, but is accepted by natural or legal
persons as a means of exchange and which can be transferred, stored and traded
electronically.20
Thereby, virtual currencies should not to be confused with electronic money.21

Technically, based on the so-called distributed ledger technology (DLT),22
transactions in crypto-currencies are recorded on a publicly accessible block-
chain,23 which represents a decentralized database that stores information in
the form of data structures or so-called blocks.24
Whether or not crypto-currencies are considered to have the potential to boost
economic activity,25 they bring change in the system of available units of account
or means of payment by offering their end-users new ways to store or transfer
value.26
Finally, as digital units of account or means of payment, crypto-currencies
should not be confused with another trend in technology-based finance—namely,
19
W. Magnuson (n 1), 1184; Ch. Brummer/D. Gorfine (n 13), 2; Cf. T. Aschenbeck/Th. Drefke, in (n
7), 309, para. 30; A. Didenko/R. P. Buckley, ‘The Evolution of Currency: Cash to Cryptos to
Sovereign Digital Currencies.’, 42 Fordham International Law Journal 2018, 2.
20
Article 1 para. 2 (d) (18) of Directive (EU) 2018/843 of the European Parliament and of the
Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the
financial system for the purposes of money laundering or terrorist financing, and amending
Directives 2009/138/EC and 2013/36/EU, OJ L 156/43 of 19 June 2018 (Anti-Money
Laundering Directive).
21
See the definition of so-called ‘e-money’ in Article 2 no. 2 of Directive (EC) 2009/110 of the
European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and
prudential supervision of the business of electronic money institutions amending Directives 2005/
60/EC and 2006/48/EC and repealing Directive 2000/46/EC, OJ L 267/7 of 10 October 2009
(E-Money Directive). See Recital 10 of the Anti-Money Laundering Directive (n 20); Also, T.
Balzli, in (n 7), 439, para. 49; S. Omlor, ‘Digitaler Zahlungsverkehr’, 3 Juristische Schulung
(Sonderheft FinTech) 2019, 290.
22
Distributed ledgers are records (ledgers) of electronic transactions maintained by a shared
(distributed) network of participants, but not by a central entity, and extensively using com-
puter-based encoding techniques, see European Securities and Markets Authority (ESMA), avail-
able at <https://www.esma.eu-ropa.eu/sites/default/files/library/2016-773_dp_dlt_0.pdf>, 8.
23
Being one of the best-known DLTs, blockchain is often used as a synonym for DLT, see T. Balzli, in
(n 7), 414, para. 1; by implication, International Organization of Securities Commissions
(IOSCO), ‘Research Report on Financial Technologies’ (February 2017), available at <https://
www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf>, 47.
24
J.D. Caytas, ‘Regulatory Issues and Challenges Presented by Virtual Currencies’, Columbia Business
Law Review (2017), available at <https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=2988367>, 1; W. Magnuson (n 1), 1185; A. Bouveret/V. Haksar, ‘What Are
Cryptocurrencies?’, 55 Finance and Development (2018), available at https://www.imf.org/exter-
nal/pubs/ft/fandd/2018/06/what-are-cryptocurrencies-like-bitcoin/basics.pdf,26, 27; S. Omlor,
‘Blockchain-basierte Zahlungsmittel: Ein Arbeitsprogramm für Gesetzgeber und
Rechtswissenschaftler’, 3 Zeitschrift für Rechtspolitik 2018, 85.
25
J.D. Caytas (n 24), 2, for instance, deems this argument unconvincing and rebuts the same.
26
See, e.g., Ph. Paech, ‘The Governance of Blockchain Financial Networks’, 80 Modern Law Review
(2017), 1074, who lists the functions of storing value and means of payment as two out of five
characteristics of bitcoin.
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372 Petja Ivanova
the existing digital payment services27 like Amazon Pay, PayPal, Cringle, and
Apple Pay, to name a few.

(ii) Technology-based capital procurement
A second area of fintech activity is the raising of capital by the use of external
financing instruments—either in a ‘positive’ way by collecting money or in a
‘negative’ way by borrowing money from lenders through platforms specifically
designed for this purpose.
Equity-, reward- and donation-based crowdfunding

Conventional ways to get large amounts of capital from a bank—for instance, in
the case of equity financing through venture capital firms or by undertaking an
initial public offering—entail high approval hurdles as costs. In contrast, fintech
seems to offer different, more convenient solutions to capital access.28 The fol-
lowing solutions can be distinguished.
Equity-based crowdfunding, also called crowd-investing, is built on the idea of
linking start-ups that search for capital, on the one hand, and willing investors, on
the other, by collecting money from a wide public while allowing the financial
backers to acquire participation in the company.29
In reward-based crowdfunding, also known as crowd-supporting, backers
enthusiastically encourage an inventive concept or a project by contributing
money while getting a non-monetary value—either goods or a prototype of the
commodity whose production is aimed to be financed—in return.30 In contrast,
in the case of donation-based crowdfunding,31 also called crowd-donating or
crowd-sponsoring, investors give away money for charity purposes by conviction
while neither counting on, nor receiving, any exchange.32
The latest type of innovative financing, which is classified as an alternative form
of crowdfunding, is the so-called initial coin offering (ICO).33 Inspired by an
initial public offering, in the case of an ICO so-called token, virtual units based on
the DLT are newly issued by an issuer of a token and purchased by interested
27
In detail, T. Aschenbeck/Th. Drefke, in (n 7), Chapter 5, 302 et seq.; D. Krimphove, ‘Keine Angst
vor FinTechs – zivil-, internationalprivat- wie aufsichtsrechtliche Einordnung’ BetriebsBerater
(2018), 2691 et seq., assessing the classification of, inter alia, digital payment services with
regard to contractual law, supervisory law and conflict of laws; Ch. Brummer/D. Gorfine (n
13), 3.
28
E.g. W. Magnuson (n 1), 1179, 1180.
29
IOSCO (n 23), 10, 11; D. Krimphove (n 27), 2695; T. Aschenbeck/Th. Drefke, in (n 7), 104, paras.
31 et seq.; E. Wallach/M. Brand, in (n 8), 56, paras. 7 et seq.
30
T. Aschenbeck/Th. Drefke, in (n 7), 106, para. 37; E. Wallach/M. Brand, in (n 8), 55, para. 5.
31
Highly practised in the US, but hardly in the EU, see T. Aschenbeck/Th. Drefke, in (n 7), 107, para.
40.
32
T. Aschenbeck/Th. Drefke, in (n 7), 107 paras. 39, 40; E. Wallach/M. Brand, in (n 8), 55, para. 4.
33
In detail, van Aubel, in Habersack/Mülbert/Schlitt, Unternehmensfinanzierung am Kapitalmarkt
(4th ed., Köln 2018), ICOs, paras. 20.3 et seq.; M. Hoche/B. Lerp, in (n 8), 223–40; On private and
tax law challenges under German law, F. Krüger/M. Lampert, ‘Augen auf bei der Token-Wahl –
privatrechtliche und steuerrechtliche Herausforderungen im Rahmen eines Initial Coin Offering’,
21 BetriebsBerater (2018), 1154–60.
Unif. L. Rev., Vol. 24, 2019, 367–395

parties that thereby aspire to finance the crowdfunding project in question and
become owners of the token.34

Loan-based crowdfunding
Next to the aforementioned methods of equity financing, loan- or lending-based
crowdfunding enables debt financing for, most importantly, small businesses and
individuals in a more certain and less costly way compared to taking up a loan
with a bank. Loan-based crowdfunding comprises debt-based crowdfunding35
and peer-to-peer (P2P) lending (the latter is also called crowd-lending).36
Possibly the most significant innovation can be attributed to the mechanism of
P2P lending. Thereby, two types can be distinguished. In ‘real’ P2P lending,
companies providing a crowdfunding platform do not grant the loans themselves
but, rather, bring businesses or individuals needing money and willing lenders
together. Consequently, every single investor who lends money concludes a con-
tract directly with the debtor. In contrast, in ‘fake’ P2P lending, an intermediated
bank pools all individual loans and only then provides the debtor with a total
credit while the loan agreement is concluded through the lending platform.37
(iii) Digital asset management

Innovative technology processes are also increasingly used in providing advising
and management services for investment and personal finance. In this business
area, fintech enterprises that offer a wide-ranging portfolio of wealth management
services via Internet platforms upstage more and more conventional financial
advisors.38 The vast range of management services makes it difficult to find a
universal definition of precisely what digital asset management is. Likewise, a
uniform description of the special segment of ‘robo-advising’ is scarcely con-
ceivable. Generally speaking, robo-advising firms offer automated investment
advice tools that are grounded in algorithmic, data-driven structures.39 The
(so far) less discussed use of artificial intelligence (AI)40 in the field of
34
M. Kaulartz/R. Matzke, ‘Die Tokeniesierung des Rechts’, 45 Neue Juristische Wochenschrift (2018),
3279; T. Aschenbeck/Th. Drefke, in (n 7), 107, 108, paras. 43, 44; S. Omlor (n 11), 306, 307.
35
Debt-based crowdfunding can be executed in form of bearer bonds, participating rights or sub-
ordinated loans, see T. Aschenbeck/Th. Drefke, in (n 7), 99, para. 17.
36
Instead of all, ibid., 99 et seq., paras. 16 et seq.
37
About both forms of P2P lending, W. Magnuson (n 1), 1182; Aschenbeck/Drefke, in (n 8), 101,
102, paras. 26, 27; IOSCO (n 23), 10, esp. n 13. More detailed about the operation of P2P lending
through pooled investments in loans—commonly practiced in Germany, while not in the USA,
e.g., E. Wallach/M. Brand, in (n 8), 55, 56, para. 6.
38
Cf. W. Magnuson (n 1), 1176.
39
IOSCO Update to the Report on the IOSCO Automated Advice Tools Survey, Final Report FR 15/
2016, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD552.pdf; Cf. Ch.
Baumanns, ‘FinTechs als Anlageberater? Die aufsichtsrechtliche Einordnung von
Robo-Advisory’, 9 Zeitschrift für Bank- und Kapitalmarktrecht (2016), 367; W. Magnuson (n 1),
1176; see also, IOSCO (n 23), 25.
40
AI can occur not only in the provision of financial services but in many other areas, such as
healthcare, engineering, natural language processing and robotics. The importance of considering
AI in a transnational law context was illustrated by Teresa Rodrı́guez de las Heras Ballell
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374 Petja Ivanova
robo-advising41 renders the amount and form of services offered by robo-

advising companies even more elusive.

C. How, finally, can fintech be portrayed?
In view of the speedy development of innovative information technologies in
financial services, detailed classifications of fintech activities should be carefully
regarded as non-exhaustive, and the term ‘fintech’ deemed flexible and open to
new innovations. The diverse and complex nature of technology-enabled innov-
ations already used in finance further impedes defining the scope of regulation.
Unlike conventional ways of offering financial products and services, digital
achievements in the financial world seem to be more opaque than explainable.
Unlike traditional financial institutions such as investment and commercial
banks, credit unions, and insurance companies, hitherto, fintech firms and
their activities are far from being conclusively determinable.
2. Embracing fintech in cross-border regulation

The next section turns to the question of why transnational financial regulation
should be concerned with fintech activities.
A. What is meant by regulation?

Before dealing with reasons for considering fintech in cross-border regulation, the
following questions are briefly addressed: What does regulation, particularly for
the purposes of financial regulation, mean42 and aim at (see subpart (i)) and how
do regulatory cooperation and coordination fit in with transnational financial
regulation (see subpart (ii))?
(i) Components of financial regulation

In order to sketch the goals, subjects, and methods of financial regulation, first, it
helps to envision the issues that regulation43 in general—be it financial, environ-
mental, or other—is concerned with. Thereby regulation is understood as real—
namely, governmentally driven or authority guided—which, inter alia, imposes
restrictions or grants freedoms to its subjects. Probably the most discussed regu-
latory issue is the determination of regulatory objectives from an economic as well
as a social point of view; this issue, of course, comes along with a look at the
(Professor, Universidad Carlos III de Madrid) in her talk on the ‘Legal Challenges of Artificial
Intelligence: A Case for Harmonization’ at the 10th TCL Teachers Conference on 18 October 2018.
41
D. Loff, in (n 7), 199, para. 24, speaking of a potential new evolution stage in fintech; Cf. S. Omlor
(n 11), 307.
42
During the discussion in Panel V at the 10th TCL Teachers Conference on 19 October 2018, Louise
Gullifer (Professor, University of Oxford) noted the importance of defining the meaning of regu-
lation depending on the context in question. By taking up this impulse, the following subpart
outlines the elements of financial regulation that is also concerned with fintech.
43
In the meaning of real, viz. governmental-driven or authority-guided regulation that, inter alia,
imposes restrictions or grants freedoms to its subjects.
Unif. L. Rev., Vol. 24, 2019, 367–395

driving reasons for choosing one or the other objective.44 Also important are the
questions of how the development of new regulation can be best approached45
and, primarily specific to financial regulation, how the organization of regulatory

systems may affect the effectiveness of regulation.46 Finally, what would clear
objectives, best approaches, and the understanding of the structure of regulatory
systems be without methods, strategies, and instruments for accomplishing regu-
latory goals?47
If we now zoom in on financial regulation, it can be defined as governmental
standards or commands backed by coercive sanctions requiring private persons to
undertake or refrain from specified conduct.48 Regulating the financial industry at
the national, regional, and global levels means maintaining the trust in the finan-
cial system through guaranteeing legal certainty, clarity, and predictability and
preserving the overall economy of damaging breakdowns. Financial regulation
aims at protecting fragile parties—namely, investors and customers—ensuring
financial markets’ efficiency and reducing any systemic risk that the financial
system might get exposed to.49 The more financial actors are vulnerable and
the more quickly adverse shocks spread as well as information is inconsistent
and the overall size of a market increases, the more systemic risk grows50 and
regulatory action is required.
Like the colour range of a painter’s palette, the actors addressed by financial
regulation vary from issuers, depositors, and clearinghouses to borrowers and
lenders, investors and investment advisers, dealers, brokers, and traders. Equally
numerous are the regulated activities—be it securities, banking, and derivatives or
investment management and insurance—and conduct—be it the management
and operation of financial institutions or trading markets and intermediaries or
the provision of financial products and services.51 Turning to the regulatory
methods, the number of strategies can be reduced to four basic approaches:
44
E. J. Pan, ‘Understanding Financial Regulation’, 4 Utah Law Review (2012), 1902 et seq.
45
About this commonly called ‘new governance theory’, for instance, B.C. Karkkainen, ‘New
Governance in Legal Thought and in the World: Some Splitting as Antidote to Overzealous
Lumping’, 89 Minnesota Law Review (2004), 471.
46
See, e.g., E. Wymeersch, ‘The Structure of Financial Supervision in Europe: About Single Financial
Supervisors, Twin Peaks and Multiple Financial Supervisors’, 8 European Business Organization
Law Review (2007), 237–306; E.J. Pan (n 44), 1906, with further references.
47
Cf. E. J. Pan (n 44), 1906, 1907.
48
Ibid., 1907 and n 55.
49
IMF Staff Discussion Note, Fintech and Financial Services: Initial Considerations (19 June 2017),
<https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2017/06/16/Fintech-and-
Financial-Services-Initial-Considerations-44985>, 14; J. Black, ‘Restructuring Global and EU
Financial Regulation: Character, Capacities and Learning’, in E. Wymeersch/K.J. Hopt/G.
Ferrarini, Financial Regulation and Supervision (Oxford 2012), para. 1.06. On the individual
risks of financial markets, e.g., A. Ruzik, Finanzmarktintegration durch
Insolvenzrechtsharmonisierung (Baden-Baden 2010), 78 et seq.
50
See, for example, W. Magnuson (n 1), 1189 et seq., who enlarges upon these four factors that
indisputably contribute to an increase in the likelihood of systemic risk events.
51
Cf. E. J. Pan (n 44), 1907, 1908.
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376 Petja Ivanova
rule making, supervision, certification, or enforcement.52 After deciding on a

strategy, the regulatory authorities empowered to work on and enforce regulation
have to choose its form. At this point, two perspectives come into play and in-

fluence the nature and effectiveness of regulation: on the one hand, regulators can
opt for public regulatory strategies that require their direct input and immediate
expenditure of regulatory resources; on the other hand, they can delegate the
burden of regulation onto private actors and, thus, vote for private regulatory
strategies.53
(ii) Focus: transnational regulatory cooperation and coordination

With regard to the high interconnectedness in the global financial market, co-
operation and coordination among domestic regulators across their national
borders has gained in importance—even more in the aftermath of the global
financial crisis.
Territorial concerns could be coped with by harmonizing54 the differing do-
mestic laws applying to particular cross-border activities and transactions in all
jurisdictions concerned. But achieving a consensus on the substance, particularly
in overly complex and dynamic areas like financial markets, is hardly possible.
Further, although the implementation of arrangements in bilateral or multilateral
treaties might be most effective and reliable, concluding treaties means passing a
difficult and costly negotiation and ratification process and plays only a limited
role in (particularly global) financial regulation.55 Hence, establishing cooper-
ation and coordination links between regulators through bilateral or multilateral
agreements, also known as memoranda of understanding, has turned out to be a
more appropriate approach to cross-border challenges in financial regulation.
Such agreements formulate non-binding statements and give birth to so-called
‘soft international law’.56 The development of transnational cooperation and
coordination among financial regulators is, in large part, coordinated and influ-
enced by international regulatory networks57 like the International Organization
of Securities Commissions (IOSCO), the Financial Stability Board, and the Basel
Committee on Banking Supervision. Their work aims at protecting investors,
52
The key elements of supervision being monitoring, assessment and guidance, see ibid., 1901 and,
in detail, 1909–1916.
53
Ibid., 1932, 1933.
54
About the instruments of international harmonization, R. Goode/H. Kronke/E. McKendrick,
‘Transnational Commercial Law. Text Cases and Materials’ (2nd Oxford, 2015), paras. 5.07 et seq.
55
Cf. L. Bromberg et al. (n 1), 3; Ch. Brummer, ‘Why Soft Law Dominates International Finance –
and Not Trade’, in Th. Cottier/J.H. Jackson/R.M. Lastra, International Law in Financial Regulation
and Monetary Affairs (Oxford 2012), 98.
56
By contrast to ‘hard law’ in the form of treaties, L. Bromberg et al. (n 1), 4; About the basic genres
of ‘soft international financial law’, Ch. Brummer (n 55), 99–101. On the relation between inter-
national, or rather ‘hard law’, and ‘soft law’, R. Goode et al. (n 54), para. 3.06.
57
Also called ‘transgovernmental networks’ by, e.g., E.J. Pan, ‘Challenge of International
Cooperation and Institutional Design in Financial Supervision: Beyond Transgovernmental
Networks’, 11 Chicago Journal of Int’l Law (2010), 243–84, esp. 254 et seq., who lists them as
one of five types of legal frameworks that international financial architecture consists of, 247 et seq.
Further, J. Black, in (n 49), para. 1.11 uses the term ‘international regulatory committees’.
Unif. L. Rev., Vol. 24, 2019, 367–395

guaranteeing fair, transparent, and efficient markets, and, ultimately, maintaining

financial stability, to name only IOSCO’s key objectives.58 For this purpose, the
networks promote regulatory convergence or harmonization of standards and

laws and ease cross-border cooperation in financial regulation by encouraging
members to assist one another, creating principles for regulators to engage in
cooperation agreements.59 Since regulators are domestic by nature, however,
building mutual trust between national regulatory bodies is a question of time
that regulatory networks are entrusted with and getting consensus regarding more
granular standards is a real challenge.60 Nevertheless, just like in cross-border
bank regulation, international regulatory networks will bear an essential meaning
in promulgating transnational regulatory standards for dealing with fintech and
its effects on the financial system.61
B. Need for cross-border regulatory mechanisms in relation to fintech

If the point of disruption is reached, there is a need for new rules.62 The disruptive
climax under the prevailing fintech industry seems to have been reached. And, yet,
is disruption necessarily a negative effect, or is the challenge to foster good dis-
ruption while preventing bad disruption?63 At least, the global and dispersed
nature of fintech calls for international legal mechanisms to ensure the proper
functioning, integrity, and profitability of the overall financial system.
(i) Financial stability as a key concern?

Up to now, systemic risk in the financial universe has been linked to large financial
institutions—above all, to banks. This is what the global financial crisis has taught
us.64 But what if the catchphrase of ‘too-big-to-fail’ associated with big financial
institutions that have been bailed out with tax payers’ money in order to avoid
far-reaching economic damages could be picked up and, in its style, fintech
firms be called ‘too-small-to-distress’? What if systemic risk, so far identified
58
IOSCO (n 23), 15.
59
L. Bromberg et al. (n 1), 4, underline that there has been significant cooperation in enforcement
and investigations relating to securities while the facilitation of convergence or harmonization
generally encounters potential challenges for regulatory networks.
60
P. Andrews (Secretary General, IOSCO) stressed these points at the conference ‘IOSCO and the
new international financial architecture: What role for IOSCO in the development and imple-
mentation of cross-border regulation and equivalence?’, 5 October 2018 in Luxembourg.
61
See up to now, the examinations by IOSCO (n 23); FSB, ‘Financial Stability Implications from
FinTech Supervisory and Regulatory Issues that Merit Authorities’ Attention’ (27 June 2017), a
paper responding to the G20 prioritization of digitization issues, <http://www.fsb.org/wpcontent/
uploads/R270617.pdf>, and, most recent, (n 84); Basel Committee on Banking Supervision
(BCBS), ‘Sound Practices, Implications of Fintech Developments for Banks and Bank
Supervisors’ (February 2018), available at <https://www.bis.org/bcbs/publ/d431.pdf>.
62
To quote Professor Rodrı́guez de las Heras Ballell in her presentation (n 40).
63
M. Demertzis et al. (n 6), 159, distinguish bad from good disruption. Cf. X. Vives (n 6), 105,
according to whom fintech has a large and potentially welfare-enhancing disruptive capability.
64
In this context, the keywords of ‘moral hazard’, ‘domino effect’, ‘too-big-to-fail’ or ‘bail-out’ shape
the discussion on banking regulation to this day.
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378 Petja Ivanova
with ‘too-big-to-fail’ institutions,65 could also be linked to ‘too-small-to-distress’

firms? Even if there are no compelling financial stability risks66 for immediate
action, the tendency of generating systemic risk resides in fintech’s disruptive

nature and makes regulating fintech across borders vital for preserving financial
stability in the long term.67 The following characteristics of fintech have the po-
tential to adversely affect the financial system.
The problems, per se, hide in the decentralized structure of the overall fintech
industry. Unlike big traditional financial institutions with wide-ranging service
portfolios, fintech firms are small-sized businesses with few employees focusing
on the provision of (mostly) only one type of financial service by operating in
automated, highly disaggregated markets in different countries.68 This kind of
business is prone to adverse external shocks and fast changes in the financial
system that, in turn, can generate systemic risk.69
Further, the way fintech companies operate may affect the stability of the fi-
nancial system. Fintech firms use borderless Internet platforms to spread their
range of financial products and services to the broad public; meanwhile, a single,
global, Internet-based financial marketplace has become established.70 Apart
from this, geographically and in terms of its addressees’ unlimited way of operat-
ing, fintech firms use various features such as automated processes and the pro-
gramming underlying their business that are likely to propagate shocks in case of
stress scenarios.71 Finally and significantly, unlike the traditional financial indus-
try, fintech companies trigger the formation of disintermediated structures in the
financial sector by circumventing existing intermediaries and offering financial
products and services in new ways.72
A third reason that could provide for instability in the financial sector is the high
information asymmetry. Since fintech firms are usually not subject to disclosure
obligations, lacking official and privately disclosed data results in a lack of transpar-
ency and makes financial markets run into danger of becoming environments for
speculation.73 Problematic in this context can be the issue of who bears the risk
65
W. Magnuson (n 1), 1197, 1198, e.g., discusses the interrelated reasons for the close relationship
between large financial institutions and the threat to financial stability.
66
FSB (27 June 2017, n 61), 1.
67
Not least because fintech’s economic functions do not fundamentally differ from traditional
finance, fintech can have implications for financial stability, see S. Andresen (n 4), 3. It can
pose serious micro- and macro-financial risks, FSB (27 June 2017, n 61), 13, 14, 17–21, notwith-
standing its potential benefits for financial stability, ibid., 13, 16, 17.
68
Instead of many, W. Magnuson (n 1), 1200.
69
As example can serve the high and fast spreading fluctuation of values of crypto-currencies, cf.
ibid., 1201.
70
71
W. Magnuson (n 1), 1201, mentions the susceptibility to hacking or automated decisionmaking as
propagation mechanisms for shocks.
72
BCBS (n 61), 20; The new ways of outbraving well-tried infrastructures are well exemplified by P2P
lending, Ch. Brummer/D. Gorfine (n 13), 5; Cf. also Paech (n 26), 1101.
73
Cf. W. Magnuson (n 1), 1203; According to the FSB (27 June 2017, n 61), 3, the lack of information
sets also limits to assessing the significance of fintech’s financial stability implications.
Unif. L. Rev., Vol. 24, 2019, 367–395

associated with transactions in P2P lending or equity-based crowdfunding. The

transfer of risk to third parties—namely, the default risk of the borrower in P2P
lending or the risk of bankruptcy in equity crowdfunding and the liquidity risk or the

lack of secondary market liquidity in both practices74—is prone to enhancing risky
market behaviour. Furthermore, the full anonymity of the usage of crypto-currencies
results in lack of governmental control, leaving the door open for abuse.75
Finally, the pace of technical innovation and the adoption of new financial
products and services as well as the fast growth of the overall fintech industry
intensify the disruption of the financial sector, creating further potential risks for
financial stability.76 Regulation normally lags behind this fast pace so that legal
uncertainty arises easily.77
All in all, in the long run, macro-financial risks with regard to fintech need to be
observed78 and their materialization prevented.79
(ii) Obstacles to an effective fintech regulation

Regulatory challenges in the fintech area and the impact on each jurisdiction vary
depending on the specific fintech sector, the state of development of financial
products and services in the region in question, and the regulatory environ-
ment.80 Hence, achieving a qualitative—namely, transparent, responsive, and
effective—regulation across borders is anything but an easy task.
In the first instance, it should be noted that fintech regulation has to answer very
dynamic requirements.81 It is not only difficult to define fintech conclusively, as
illustrated above, but also, in addition to the challenges common to all segments
of the fintech industry, every single fintech field shows its own legal and technical
complexity that should be considered separately. Regulation has to identify those
fields of the law dealing with each type of fintech activity or institution.82 As
colourful and agile as the fintech industry is,83 the regulatory response needs to
be just as manoeuvrable.
74
IOSCO (n 23), 17.
75
E.g. with a view to money laundering, see A. Bouveret/V. Haksar (n 24), 27; J.D. Caytas (n 24), 1.
76
Instead of many, cf. Ch. Brummer/D. Gorfine (n 13), 4.
77
A. Didenko (n 1), 320, notes that existing regulatory regimes often do not support the new fintech
products, services and business models.
78
Besides managing third-party dependencies and cyber-risk, monitoring micro-financial risks is the
third priority for international collaboration in the fintech area, see S. Andresen (n 4), 6.
79
The risk of contagion could be inhibited through substantive risk regulation by means of ex ante
and ex post rules, whereby the scope of limitations much depends on the specific fintech nature, in
detail, W. Magnuson (n 1), 1217, 1218.
80
FSB, ‘FinTech and Market Structure in Financial Services: Market Developments and Potential
Financial Stability Implications’ (14 February 2019), available at <http://www.fsb.org/wpcontent/
uploads/P140219.pdf>, 1; A. Didenko (n 1), 313.
81
Cf. J. Black, in (n 49), para. 1.09, predicating an effective financial regulation in general on the
collective capacity of the regulatory system to regulate dynamically.
82
G. Ferrarini, ‘Regulating FinTech: Crowdfunding and Beyond’, 2 European Economy: Banks,
Regulation and the Real Sector (2017), 122.
83
Cf. A. Didenko (n 1), 338, who regards fintech diversity and the rapid development in technology
as considerable challenges affecting regulatory agendas.
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380 Petja Ivanova
Overcoming information asymmetries

An effective regulation of the fintech domain indispensably requires a monitoring
system with centralized control over fintech actors.84 Just at this point, however,

regulation collides with a serious obstacle—the lack of transparency caused by
information asymmetries. In view of the complex decentralized fintech structure,
the first condition for effective control—namely, identifying fintech actors—is
already hard to fulfil and the second condition of monitoring the behaviour of
these actors is no less challenging.85 Here, a further obstacle intervenes, for regu-
lators are not fully aware of how fintech businesses work. The lack of techno-
logical expertise on how innovations function—for instance, in the case of errors
in overly complex algorithmic structures in robo-advising—can substantially
hamper their responsive and effective regulation.86 Moreover, it is difficult for
regulators to distinguish helpful from harmful innovative technology.87
Notwithstanding the pursuit of a governmental monitoring system, motivating
fintech players to efficiently self-monitor their business could support regulation.
However, it is questionable if private fintech actors, considering the costs
incurred, would voluntarily build up a self-policing system and monitor them-
selves at the best level.88 And, yet, to the extent that fintech businesses provide
core banking services, their activities must be monitored by regulators in order to
follow risk migration.89 For the purpose of establishing a monitoring regime,
regulators need to get access to quality information in a cost-effective way; this
could be realized not only through regulatory sandboxes90 but also by simplifying
registration procedures or avoiding split-ups of regulatory authorities.91 As for
cross-border cooperation, regulators should ensure a sufficient level of informa-
tion sharing. Since regulatory approaches to one and the same fintech solution
can significantly differ from jurisdiction to jurisdiction, promoting international
coordination among domestic regulators is decisive for the effectiveness of fintech
regulation.92 Provided that domestic regulators have information about the
impact of particular fintech regulation from their own experience at their dis-
posal, this information might be of help to foreign regulators and, therefore,
84
At this point, a parallel can be drawn to the existing supervisory regimes for banks issuing trad-
itional financial instruments and depositing securities.
85
W. Magnuson (n 1), 1205, 1206; Also, D.W. Arner/D.A. Zetsche et al. (n 8), 52.
86
IOSCO (n 23), 33; Further, J. Caytas (n 24), 2, 3, refers to the required technological capacity and
expertise as the main reason for the many obstacles to the regulation of bitcoin as a currency.
87
Ch. Brummer/D. Gorfine (n 13), 6.
88
W. Magnuson (n 1), 1219 et seq., proposing that regulators could incentivize fintech players to
self-policing by introducing collective sanctions in case of misbehaviour, see 1221.
89
Y. Mersch (Member, Executive Board of the ECB), ‘Lending and payment systems in upheaval: the
fintech challenge’, available at <https://www.ecb.europa.eu/press/key/date/2019/html/ecb.
sp190226d98d307ad4.en.html>.
90
See part III.1.B.(iv) below. In order to guarantee equal treatment with regard to fintech businesses
willing to participate in sandboxes any preferential treatment should be avoided and eligibility
criteria for admission be clear, devoid of regulatory arbitrariness, A. Didenko (n 1), 340.
91
Cf. W. Magnuson, (n 1), 1215–17.
92
For example, the different approaches to cryptocurrencies, A. Didenko (n 1), 336, 337.
Unif. L. Rev., Vol. 24, 2019, 367–395

worth exchanging.93 Moreover, cooperation and coordination between regulators

and private fintech actors could also be beneficial to overcoming the lack of
transparency.

Rule of law
Rather than technical problems, rule of law challenges can be considered even
weightier obstacles to fintech regulation.94 Guaranteeing equal treatment of all
parties involved in fintech transactions and providing for legal certainty, clarity,
and predictability are core to a strong rule of law that sets the basis for greater
investment and stable growth. In this context, regulators must level the playing
field and grant guidance to fintech firms, fight against regulatory arbitrage, and
foster international cooperation.95 Of paramount importance to regulators
should be the protection of consumers and investors at the domestic level and,
in view of the increasing cross-border activities of fintech firms, at the regional96
and global levels. The need for consumer and investor protection, therefore, is
accompanied by the need for general financial education and understanding.97
Finding a regulatory equilibrium

Legal certainty, equal treatment, and investor or customer protection98 coincide
with the need to foster technological innovation in the area of finance. Possibly
the greatest challenge to be met is achieving the right balance between regulating
the fast-growing fintech industry in order to guarantee systemic stability and
encouraging technological developments in the financial sector.99 Low costs
and low barriers for fintech actors’ entry impede the implementation of a regu-
latory framework that neither preventively limits innovation nor falls short in
adequate protection.100 The more rigorously fintech regulation is designed for the
sake of legal certainty and financial stability, the more technological progress is
likely to be held back and competition to be restricted. There is only a fine line
between reasonably protecting investors and consumers of technology-based fi-
nancial products and services and over-regulating the fintech domain. How to
93
W. Magnuson (n 1), 1222, 1226.
94
See the view of A. Didenko (n 1), 314, in detail, 333 et seq.
95
Ibid., 339–41 and 333–38.
96
Recently, on the need of a common EU-wide approach to ensure investor protection in the area of
crypto-assets, European Securities Markets Authority (ESMA), Advice to the EU Institutions on
initial coin offerings and crypto assets (9 January 2019), available at <https://www.esma.europa.
eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf>.
97
Ch. Brummer/D. Gorfine (n 13), 6, refer to the ‘democratization of financial and investment
opportunity’ caused by the, by all means worthy, social goals of fintech, viz. decreasing transaction
costs, greater global financial inclusion and growing opportunities.
98
About the offloading of risk to third parties in P2P lending and equity-based crowdfunding, see
supra section II.2.B.(i).
99
Cf. D.W. Arner/D.A. Zetsche et al. (n 8), 49; Ch. Brummer/D. Gorfine (n 13), 5; Ph. Treleaven,
‘Financial Regulation of Fintech’ 3 Journal of Financial Perspectives: FinTech, EY Global Financial
Services Institute (2015), available at <https://www.ey.com/Publication/vwLUAssets/ey-financial-
regulation-of-fintech/$FILE/ey-financial-regulation-of-fintech.pdf>, 5.
100
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382 Petja Ivanova
remove this tension without running into danger of under-regulating is hard to

put into practice.

Regulatory competition
Next, while domestic fintech regulations affect the country’s own fintech indus-
try, they can affect the fintech sector in other countries as well by causing distri-
butional effects that can culminate in regulatory competition.101 If a regulator
inflicts very strict regulations on fintech actors in its jurisdiction, the consequence
might be that fintech activities shift to foreign jurisdictions with less burdensome
rules, and, vice versa, if a regulator introduces rules favouring fintech actors, the
latter will rather choose to set up their business and operate in this jurisdiction.
Such interactions can result in a competition among regulators to either lower
regulatory burdens, which, in turn, can provoke abusiveness or create more ef-
fective and rigorous rules.102 In the worst case, regulators might have neither
considered the effects of their own rules on other countries nor taken other
countries’ rules into account, so that overlapping and conflicting fintech regula-
tions challenge fintech businesses to find their way out of the regulatory
labyrinth.103
Impact on traditional financial institutions

Regulators do not face obstacles regarding the fintech domain itself. Fintech gives
rise to challenges affecting other areas in the financial sector—above all, the op-
eration of traditional financial institutions. First, detached from other financial
actors, fintech firms, meanwhile, independently and directly compete with con-
ventional financial institutions for winning consumers throughout the world.104
In light of the more and more converging nature of the financial industry, regu-
lators are challenged to coordinate with other regulatory authorities and to regu-
late economic activity by focusing no longer on the covered entity only.105
Second, banks’ profitability might suffer from a growing demand for technol-
ogy-enabled financial services. The role of banks as intermediaries has declined,
and fintech firms increasingly undertake tasks that traditional financial institu-
tions cannot, or choose not to, accomplish.106 By setting lower prices for their
clients and by providing a broader customer structure with products and services
of easier access—platforms for asset management services, for example—they
outshine financial institutions that offer only conventional services.107 In the
101
W. Magnuson (n 1), 1223, 1224.
102
In the sense of ‘race to the bottom’ or ‘race to the top’, ibid., 1223.
103
Cf. ibid.
104
Brummer/D. Gorfine, (n 13), 5, talk about ‘the industry convergence’ fintech drives.
105
Ibid.
106
G. Buchak/G. Matvos/T. Piskorski/A. Seru, ‘Fintech, Regulatory Arbitrage, and the rise of Shadow
Banking’, available at <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2941561>, 2, as-
certain a decline in traditional banking; Ph. Treleaven, (n 99), 5.
107
Cf. W. Magnuson (n 1), 1178.
Unif. L. Rev., Vol. 24, 2019, 367–395

end, banks either would not manage to offer the digital financial products and
services demanded by customers leaving the market dominance to fintech busi-
nesses or would engage with fintech firms and still leverage innovative technol-

ogies to enhance their range of products and services and keep their customer
relationships and core banking activities alive.108 In either case, implications on
bank regulation will also spring up in the future.
Determining cross-border risks

Finally, it is challenging to identify and find an answer to all imminent individual
cross-border risks. For instance, in the case of P2P lending platforms that dis-
tribute loans or securities of individuals and firms from certain jurisdictions to
lenders or investors based in other jurisdictions, it is commonly unclear under
which law the lender or investor can seek redress in the event of default or
bankruptcy.109
(iii) Opportunities for fintech regulation

Regardless of regulatory risks, challenges, and limitations, the emerging innova-
tive technologies in the financial sector hide regulatory chances.110 For one thing,
innovative information technology paradigms can be applied for the purposes of
financial regulation and facilitate the latter.111 Further, and importantly, regula-
tors are encouraged to collaborate with fintech actors112 in automating regulation
as well as with academia in regulatory and policy research.113 Rule making relat-
ing to fintech also offers the opportunity to gain from public participation,
including not only market participants but also consumer or investor advo-
cates.114 Finally, fintech’s disruptive impact, albeit a challenge, can help to re-
inforce regulatory cooperation across borders by pushing the creation of more
108
Cf. Y. Mersch (n 89) who sketches these two extreme scenarios; See also M. Bofondi/G. Gobbi,
‘The Big Promise of Fintech’, 2 European Economy: Banks, Regulation and the Real Sector (2017),
111. About how fintech affects banking, e.g., X. Vives (n 6); Further, on strategic relationships
between banks and fintech firms, L. Hornuf/M.F. Klus/T.S. Lohwasser, A. Schwienbacher, ‘How
Do Banks Interact with Fintechs? Forms of Alliances and their Impact on Bank Value’, CESifo
Working Paper no. 7170 (July 2018), available at <https://papers.ssrn.com/sol3/papers.cfm?ab-
stract_id=3252318>.
109
IOSCO (n 23), 16.
110
The opportunities for fintech regulation should not to be confused with the benefits for the
financial system and its stability that fintech can entail, on these FSB (27 June 2017, n 61), 13,
16, 17.
111
Ph. Treleaven (n 99), 4; About regtech, (n 8) above; In their concept of a so-called ‘smart regu-
lation’, D.W. Arner/D.A. Zetsche et al. (n 8), 48 clarify that from the standpoint of applying
technology to regulation (regtech), it involves digitization of systems that in turn support appli-
cation of advanced analytical approaches to provide for better regulation.
112
This opportunity is well exemplified by the ‘Project Innovate’ launched by the Financial Conduct
Authority (FCA’) of the UK in 2014 that contains first-time regulatory tools, viz. the so-called
innovation hub and the sandbox, about this regulatory approach in the UK, see S. Nießner/S.
Schlupp, in (n 8), 49, 50; Huertas, in (n 3), 103 et seq. About innovative hubs and regulatory
sandboxes, see III.1.B. (iii) and (iv) below.
113
See Ph. Treleaven (n 99), 4.
114
Cf. Ch. Brummer/D. Gorfine (n 13), 11, stress that participation of public groups of the industry
and consumer and investor advocates can play a valuable role in the rule-making process.
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384 Petja Ivanova
dynamic, responsive, and proactive regulatory frameworks that mitigate the risk
of frag-mentation and limit drivers for systemic risk.115

(iv) Bottom line
In conclusion, fintech regulation should strive to eliminate the disruptive effect of
innovative technologies in finance that jeopardizes the fair treatment of investors
and the integrity and stability of the financial system without harming innovation
and impeding the growth of fintech businesses. In view of all of the obstacles to
fintech regulation that there are already for domestic regulators, it is no easy
mission to commit to whether existing regulation should be adapted to the vari-
ous fintech segments focusing on their function116 or, rather, on special regimes
newly designed.117 Since fintech firms do not exercise their activities in only one
domestic market but, rather, operate across borders, searching for friendly juris-
dictions to set up their business, cross-border issues will become increasingly
relevant, and fintech regulation will have to have an extraterritorial dimension
as well.118 Finding a common regulatory denominator at the transnational level,
however, is difficult. While setting international regulatory standard and cross-
border mechanisms in regard to fintech might not be achievable overnight, it
remains vital ‘that each may be prepared for the benefits and opportunities, as
well as the risks and challenges [the transformation of financial services]
presents’.119
III. Cross-border regulation of fintech: current state

First, it should be noted that present fintech regulation, be it at the national,
regional,120 or international level, is in a very early stage. And, yet, as far as the
mechanism of transnational cooperation and coordination among regulators is
concerned, a movement for almost the past three years can be noticed.
115
The FSB (27 June 2017, n 61), 1, sees clear benefits to greater international cooperation.
116
In this sense, G. Ferrarini (n 82), 140, proposes to harmonize the regulation of, e.g., equity-based
and loan-based crowdfunding at European level under a functional approach, that should be
grounded on securities regulation principles rather than introducing a radical reform. D.W.
Arner/D.A. Zetsche et al. (n 8), 47, 50, speak of ‘flexibility and forbearance’ as the second out
of four regulatory approaches to fintech under which existing rules are relaxed depending on the
specific context.
117
Cf. G. Ferrarini (n 82), 122; Besides ‘flexibility and forbearance’, D.W. Arner/D.A. Zetsche et al. (n
8), 47, 50, describe three more regulatory approaches: ‘doing nothing’, ‘restricted experimenta-
tion’, viz. establishing new structures for testing like regulatory sandboxes and ‘regulatory devel-
opment’, viz. the design of new rules covering the new actors and activities.
118
Cf. S. Andresen (n 4), 5; W. Magnuson (n 1), 1223 et seq., who, however, argues that fintech
regulation must not be uniform aiming at a single global framework on all jurisdictions, but
rather ensure the acquisition of helpful and usable information while enabling regulators’ com-
petition and experimentation with their types of fintech regulation.
119
As IOSCO concludes in its report (n 23), 75.
120
The EU, for instance, only on 8 March 2018, has set out steps to encourage a broader consider-
ation of technological innovation in the financial sector in the European Commission’s
‘Fintech Action Plan: For a more competitive and innovative European financial sector’,
COM(2018) 109 final, available at <https://eur-lex.europa.eu/legal-content/EN/TXT/
?uri=CELEX:52018DC0109>.
Unif. L. Rev., Vol. 24, 2019, 367–395

1. The blossoming of bilateral fintech cooperation agreements

A. Introducing the approach of bilateral fintech cooperation

agreements
The above-mentioned movement of cooperation and coordination refers to the
bouquet of multiple, bilateral fintech cooperation agreements121 that have blos-
somed in the recent past. The first agreement of this kind, entered into on 23
March 2016, is the Innovation Hubs Co-operation Agreement between the
Financial Conduct Authority (FCA) and the Australian Securities and
Investment Commission (ASIC).122 Since then, numerous bilateral fintech co-
operation agreements have been signed—for example, between the FCA and the
Hong Kong Securities and Futures Commission,123 the ASIC and the Monetary
Authority of Singapore,124 the ASIC and the Ontario Securities Commission,125
the ASIC and the US Commodity Futures Trading Commission (CFTC),126 the
Swiss Financial Market Supervisory Authority (FINMA) and the Securities and
Exchange Commission of Brazil (CVM),127 and, recently, the French Autorité des
Marchés Financiers (AMF) and the China Securities Regulatory Commission
(CSRC),128 to mention only a very few. These agreements principally aim at
building a framework for assistance and referral by enabling regulators to share
information on innovation topics and to reciprocally support fintech firms
121
About other earlier forms of regulatory cooperation, namely memoranda of understanding on
securities supervision and enforcement, and for a comparison of these with the bilateral fintech
cooperation agreements, see L. Bromberg et al. (n 1), 3–10, 16, 17.
122
Available at <https://www.fca.org.uk/publication/mou/fca-asic-cooperation-agreement.pdf>,
extended by the ‘Innovation Hubs Enhanced Co-operation Agreement’ of 22 March 2018,
<https://www.fca.org.uk/publication/mou/enhanced-fca-asic-cooperation-agreement.pdf>.
123
Dated 12 May 2017, available at <https://www.sfc.hk/web/EN/files/ER/MOU/
Signed%20MoU%20 between%20SFC%20and%20FCA.pdf>. Hitherto, the Hong Kong
Securities and Futures Commission (SFC) has signed six cooperation agreements, list available
at <https://www.sfc.hk/web/EN/sfc-fintech-contact-point/international-cooperation-agree-
ment.html>.
124
Dated 16 June 2018, available at <http://www.mas.gov.sg//media/resource/news_room/press_
releases/2016/
Signed%20copy%20of%20the%20Innovation%20Functions%20Cooperation%20Agreement.
pdf>. So far, the Monetary Authority of Singapore has entered into 30 fintech cooperation
agreements, see listing at <http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-
Financial-Centre/FinTech-Cooperations.aspx>.
125
Dated 1 November 2016, available at <http://www.osc.gov.on.ca/documents/en/About/
20161110_agreement-innovative-fintech-businesses.pdf>. In late 2017, cooperation with the
ASIC was extended to the remaining seven out of the eight largest provinces in Canada by the
‘Innovation Functions Co-operation Agreement’, <https://download.asic.gov.au/media/
4572195/20171211-asic-csa-members-agreement-on-fintech-cooperation.pdf>.
126
Dated 4 October 2018, available at <https://www.cftc.gov/sites/default/files/2018-10/cftc-asic-
cooparrgt100418.pdf>.
127
Of July 2018, available at <http://www.cvm.gov.br/export/sites/cvm/menu/internacional/acor-
dos/ anexos/MoU_FINMA.pdf>.
128
Dated 25 March 2019, available at <https://www.amf-france.org/en_US/Actualites/
Communiques-de-presse/AMF/annee-2019?docId=workspace%3A%2F%2FSpacesStore%2F7f0
c14f4-87ef-4add-8e51-e130733847b4>.
Rev. dr. unif., Vol. 24, 2019, 367–395

386 Petja Ivanova
(so-called ‘innovator businesses’).129 For this purpose, they set out both how
regulatory authorities plan to share and use information on innovation in their
respective markets130 as well as how to refer to one another. Bilateral fintech

cooperation agreements form part of the public regulatory strategies of the regu-
lators involved. These agreements entail elements of supervision, such as the
information acquisition through mutual exchange that helps monitoring and
assessing fintech firms, on the one hand, or the guidance offered to fintech
firms through the regulators’ innovation functions, on the other hand.131 With
a view to the support provided to innovator businesses during the pre-authoriza-
tion application phase,132 for instance, bilateral fintech cooperation agreements
contain elements of certification as well.
B. Content of bilateral fintech cooperation agreements

Bilateral fintech cooperation agreements concluded so far show the same or simi-
lar structure and characteristics, which leads to a high level of standardization.133
They contain definitions of the relevant terms followed by provisions about the
purpose, the key principles that underlie the agreement (see subpart (i)), and the
scope of assistance (see subpart (ii)), as well as, in closing, confidentiality (see
subpart (iii)), term, and amendment provisions. In order to lay the foundation
for an assessment of bilateral fintech cooperation agreements, the following sec-
tion works out their key elements.
(i) Key principles

The principles that govern bilateral fintech cooperation agreements underpin the
intention of the regulatory authorities to provide the fullest mutual assistance to
one another within the terms of the respective agreement.134 Thereby, the agree-
ment operates subject to domestic laws and regulations and does not modify or
supersede any regulatory requirements or laws in force in, or applying to, the
regulators’ countries.135 Importantly, bilateral fintech cooperation agreements
129
‘Innovator Business’ means a financial business that has been offered support from an Authority
through its innovation hub, see exemplary, the definition in clause 1 of the FCA-ASIC agreement
of 2018 (n 122); A mite more detailed, ASIC-CFTC agreement (n 126), clause 5. By contrast, other
agreements, e.g., AMF-CSRC agreement (n 128), Article 1 clause 3, and FINMA-CVM agreement
(n 127), clause 1, use the term ‘Financial Innovator’ that stands for any entity which provides or
intends to provide innovative financial services in either of the authorities’ jurisdictions.
130
See clause 3.1., FCA-ASIC agreement of 2018 (n 122) and ASIC-OSC agreement (n 125).
131
See about the instrument of information sharing and the referral mechanism, III.1.B.(ii) below.
132
E.g. FCA-ASIC agreement of 2018 (n 122), clause 2.5.3; Also, CFTC-FCA Cooperation
Arrangement (19 February 2018), available at <https://www.fca.org.uk/publication/mou/fca-
cftc-co-operation-agreement.pdf>, clause 19 lit. c
133
Cf. L. Bromberg et al. (n 1), 15.
134
Exemplary for all, ASIC-CFTC agreement (n 126), clause 10; FCA-ASIC agreement of 2018 (n
122), clause 4.1; Co-operation Agreement between the Hong Kong Monetary Authority (HKMA)
and the FINMA (23 January 2018), available at <https://www.newsd.admin.ch/newsd/message/
attachments/51125.pdf>.
135
Exemplary, FCA-ASIC agreement of 2018 (n 122), clause 4.1; ASIC-CFTC agreement (n 126),
clauses 11, 12, whereby this provisions are slightly more extensive and underlie that ‘[the]
Unif. L. Rev., Vol. 24, 2019, 367–395

create only a statement of intent and do not provide for enforceable rights nor are
they legally binding. Furthermore, they do not affect other arrangements under
existing agreements between the two regulatory authorities.136

(ii) Scope: building blocks of cooperation and coordination
The scope of assistance determined in fintech cooperation agreements can vary,
ranging from, exclusively, information sharing to, additionally, joint innovation
projects and/or the mechanism of referral.
Information sharing
The core elements of every bilateral fintech cooperation agreement are the pro-
visions on the sharing of information about innovation-related matters that affect
the regulators’ markets. They may include the exchange of:
• information on innovator businesses subject to the referral mechanism;
• emerging market trends and developments, such as AI, big data, robo-ad-
visors, blockchain-related developments, and crypto-assets;
• regulatory and policy issues on innovations in financial services; and
• fintech related issues, such as data protection and cyber security.137
The lists of information that can be shared, however, are non-exhaustive and
grant regulatory authorities a margin of discretion to decide on further fintech
aspects that are worth exchanging. Supplementary fintech cooperation agree-
ments can, but do not necessarily have to, specify how requests for information
must be made with regard to formal and substantive criteria. For instance, an
agreement can determine that a request should be made in writing and addressed
to the relevant contact at the requested authority and must indicate the informa-
tion sought by the requesting authority, a description of the matter that is the
subject of the request, the purpose for which the information is sought, and the
desired time period for reply.138
Arrangement does not confer upon any person the right or ability directly or indirectly to obtain;
suppress, or exclude any information or to challenge the execution of a request for information
under this Arrangement.’
136
FCA-ASIC agreement of 2018 (n 122), clause 4.1; See also ASIC-CFTC agreement (n 126), clause
12.
137
AMF-CSRC agreement (n 128), Article 5, clause 1; FCA-ASIC of 2018 (n 122), clause 5.9; also,
agreements between FINMA and SFC (23 February 2018), <https://www.sfc.hk/web/EN/files/ER/
MOU/2018.02.23_SFC_FINMA%20Fintech%20Co-operation%20Agreement.pdf>, clause 5.2.;
FCA and CFTC (19 February 2018), <https://www.fca.org.uk/publication/mou/fca-cftc-co-op-
eration-agreement.pdf>, Article 3, clause 20; ASIC and the Indonesian Otoritas Jasa Keuangan
(21 April 2017), <http://download.asic.gov.au/media/4223673/asic-ojk-mou-agreement-signed-
21042017.pdf>; FCA and People’s Bank of China (11 November 2016), <https://www.fca.org.uk/
publication/mou/fca-pboc-co-operation-agreement.pdf>; the ASIC and the Capital Markets
Authority of Kenya (21 October 2016), <http://download.asic.gov.au/media/4052135/asic-
cma-fintech_cooperation_agreement-1.pdf>.
138
As exemplified by clause 22 and clause 23 of the ASIC-CFTC agreement (n 126).
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388 Petja Ivanova
Expertise sharing and joint innovation projects

In some instances, regulators agree on sharing knowledge and expertise about
technological innovations in financial services by giving presentations and con-

ducting training sessions for the other authority.139 This exchange may include
know-how about regulation technology and the operation of an authority’s regu-
latory sandbox.140
Furthermore, in some bilateral fintech cooperation agreements, the regulatory
authorities commit themselves to consider hosting joint innovation events to
explore the application of key and emerging technologies. In particular, for this
purpose, regulators agree on undertaking joint trials, training sessions and ex-
periments, innovation competitions, and research on new technologies.141
Referral
In addition to information sharing, in a majority of bilateral fintech agreements,
cooperation between the regulatory parties is substantially based on the mechan-
ism of referral. This new regulatory feature serves as a hinge that links the estab-
lished innovation function—for instance, the so-called innovation hub142 and the
regulatory sandbox143 of one regulatory authority to those of the other regulator.
In the following, innovation hubs will exemplify the use of innovation functions
within the fintech cooperation between two regulatory authorities. Innovation
hubs and regulatory sandboxes represent two main categories of innovation fa-
cilitators.144 They not only are distinguishing regulatory tools within modern
fintech regulation at the national level but also, meanwhile, play an important
role in transnational cooperation.
(iii) Regulatory innovation hubs

Where bilateral cooperation agreements allow for referral, each regulator that is
party to the agreement already offers a dedicated innovation function to support
innovation in financial services in its respective jurisdiction.145 In many instances,
139
Exemplary, FINMA-CVM agreement (n 127), clause 5.5 and AMF-CSRC agreement (n 128),
Article 5, clause 4; HKMA-FINMA agreement (n 134), clause 5.4.
140
See FCA-ASIC agreement of 2018 (n 122), clauses 5.14.
141
Ibid., clauses 6.1 and 6.2; ASIC-CFTC agreement (n 126), clause 30 on ‘Innovation Learning’;
AMF-CSRC agreement (n 128), Article 5, clause 3; HKMA-FINMA agreement (n 134), clause 5.3.
142
The first innovation hub was launched by the UK in 2014, see supra (n 112). In the European
region, e.g., innovation hubs have been built by the regulatory authorities in 21 EU Member States
and three States of the European Economic Area so far, see European Supervisory Authorities
(ESA), ‘Joint Report on Regulatory sandboxes and innovation hubs’ (7 January 2019), available at
<https://esas-joint-committee.europa.eu/Publications/Reports/
JC%202018%2074%20Joint%20Report%20on%20Regulatory%20Sandboxes%20and%20Inno-
vation%20Hubs.pdf#search=report%20innovation%20hubs>, Annex A, 40, 41.
143
At the date of ESA report (n 142) only five EU Member States, namely UK, Lithuania, Denmark,
Netherlands, Poland, had sandboxes in operation, ibid., 16 and Annex A, 40, 41.
144
Ibid., 5.
145
See, e.g., ASIC-CFTC agreement (n 126), clauses 24 to 29 in connection with clause 4,
HKMA-FINMA agreement (n 134), clause 5.1 in connection with clause 1, that use the generic
term ‘innovation function’ since not every regulator has an innovation hub. In the ASIC-CFTC
Unif. L. Rev., Vol. 24, 2019, 367–395

the innovation function established by the regulators in their jurisdiction is an

innovation hub.146 Innovation hubs provide a dedicated point of contact and
support for fintech businesses to raise enquiries with the competent regulatory

authority on fintech issues and to seek non-binding guidance on the conformity
of innovative financial products, services, or business models with licensing or
registration requirements and regulatory and supervisory expectations in their
jurisdiction.147
(iv) Regulatory sandboxes

Before entering into a fintech cooperation agreement, each of the two regulators
may also have set up a regulatory sandbox in its jurisdiction.148 Established by the
regulatory authority in consultation with fintech firms, regulatory sandboxes are
environments freed of licensing obligations and regulatory requirements in which
fintech businesses are allowed to test their concepts.149 They aim at providing a
monitored space in which regulators and firms can better understand opportu-
nities and risks presented by innovations and their regulatory treatment and
assess the viability of innovative propositions, especially in terms of their appli-
cation and compliance with regulatory and supervisory requirements.150
Sandboxes are a new and, for fintech businesses as well as for authorities, cost-
effective way of regulation in finance.151 Regulatory sandboxes encourage trans-
parency of dispensation practices on a case-by-case basis and offer the opportun-
ity to compare among potential entrants to the sandbox. However, sandboxes are,
to a large extent, human driven and analogue in their monitoring so that they
need to be made smarter and equipped to self-monitor the activity within
them.152
(v) Functioning of the referral mechanism

Through their innovation functions—namely, innovation hubs—the two regu-
latory authorities agree on referring to one another those innovator businesses
that would like to enter the market and operate in the jurisdiction of the other
agreement, for instance, the ASIC has set up an innovation hub (clause 18) while the CFTC has
introduced the initiative LabCFTC to facilitate innovation and foster open, transparent, com-
petitive and financially sound markets to serve the public interest (clause 17).
146
Exemplary, FCA-ASIC agreement of 2018 (n 122), clause 5 in connection with clause 1.
147
ESA (n 142), 5, 7.
148
See, for instance, FCA-ASIC agreement of 2018 (n 122), clauses 5.6 to 5.8 in connection with
clause 1.
149
E.g. D. Leimgruber/B. Flückiger, in (n 7), 48 et seq., para. 24; D. Krimphove/K. Rohwetter,
‘Regulatory Sandbox – Sandkastenspiele auch für Deutschland? Zur Möglichkeit einer verein-
fachten aufsichtsrechtlichen Prüfung von FinTechs’, 12 Zeitschrift für Bank- und
Kapitalmarktrecht (2018), 495.
150
See this definition by the ESA (n 142), 16, para. 32. A uniform regulatory sandbox proceeding
does not exist yet, see D. Krimphove/K. Rohwetter (n 149), 495.
151
D.W. Arner/D.A. Zetsche et al. (n 8), 50.
152
Ibid.
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390 Petja Ivanova
regulator.153 Thereby, a regulator may refer an innovator business to the other

regulator for the purposes of participation in the receiving authority’s regulatory
sandbox.154 Innovator businesses coming from the jurisdiction of the ‘referring

authority’, willing to get access to the market and jurisdiction of the other au-
thority (receiving authority), have to demonstrate in writing that they meet the
criteria for support of their own (the referring authority).155 Once a referral is
accepted, the support offered through the innovation hub of the receiving au-
thority to each referred business may contain:
• a dedicated team and/or contact;
• help to understand the regulatory framework in the relevant authority’s jur-
isdiction and how it applies to the innovator business;
• support during the pre-authorization application phase and an efficient
authorization process; and
• a dedicated contact and further assistance for a period of one year after the
innovator business is authorized and when circumstances require it.156
If authorization in the referring jurisdiction has been already granted, the
authorities seek to enable quicker processing in terms of authorization in the
receiving authority’s jurisdiction.157 Notwithstanding the promised mutual sup-
port through innovation hubs, however, regulators do not express an opinion
about whether an innovator business will finally meet the requirements for
authorization in their jurisdiction.158
(vi) Confidentiality
Bilateral fintech cooperation agreements contain principles for confidentiality
and permissible uses of information. The respective provisions allow only the
two regulators involved to access disclosed information and to use the same.159
They stipulate that any information disclosed by one regulator to the other will be
treated by the receiving authority as confidential.160 A receiving authority is
permitted to use information about a referred innovator business only for the
purpose of providing assistance to the referred fintech business through the in-
novation hub of the receiving authority and ensuring compliance with the law of
153
Instead of all, FCA-ASIC agreement of 2018 (n 122), clause 5.1; ASIC-CFTC agreement (n 126),
clause 24; HKMA-FINMA agreement (n 134), clause 5.1.
154
FCA-ASIC agreement of 2018 (n 122), clauses 5.6 to 5.8.
155
Ibid., clause 5.2; also, ASIC-CFTC agreement (n 126), clause 26, that does not expressly prescribe
a written form but requires the referral to include information demonstrating that the criteria for
referral are met.
156
FCA-ASIC agreement of 2018 (n 122), clause 5.3 in connection with section 2.5; also, ASIC-CFTC
agreement (n 126), clause 28 in connection with clause 19; HKMA-FINMA agreement (n 134),
clause 2.3.
157
FCA-ASIC agreement of 2018 (n 122), clause 5.4.
158
Ibid., clause 5.5; ASIC-CFTC agreement (n 126), clause 29.
159
Exemplary, ibid., clauses 7.1 to 7.5 and AMF-CSRC agreement (n 128), Article 6.
160
FCA-ASIC agreement of 2018 (n 122), clause 7.1; Cf. AMF-CSRC agreement (n 128), Article 6,
clause 1; also, ASIC-CFTC agreement (n 126), clause 35.
Unif. L. Rev., Vol. 24, 2019, 367–395

the receiving authority’s jurisdiction.161 If disclosed information is intended to be

used by the receiving authority for purposes other than those for which it has been
referred, the referring authority’s consent is required.162

In case of termination of the cooperation agreement or if the same is super-
seded, the confidentiality provisions still apply with regard to information ob-
tained under the agreement.163
2. Bilateral fintech cooperation agreements – for good or for bad?

What is the role for bilateral fintech cooperation agreements in cross-border
financial regulation in the end? Do they contribute to mitigating not only the
complexities that fintech businesses are confronted with but also regulatory obs-
tacles arising out of the widespread fintech activities? And are they considerably
fostering transnational regulatory cooperation and coordination among domestic
regulators?
A. Role and implications

In regard to information and expertise sharing and the support of fintech busi-
nesses in entering both financial markets and jurisdictions, the bouquet of bilat-
eral cooperation agreements takes up the valuable opportunity provided by the
fintech sector to enhance cross-border regulatory cooperation and coordination.
Moreover, where the agreements provide a referral scheme and interlink the
innovation functions of two regulators, the opportunity of promoting the col-
laboration of regulators with fintech actors is embraced.
In cases where bilateral agreements contain not only information-sharing pro-
visions but also a referral mechanism, fintech businesses, insofar as they meet the
criteria for support of the referring authority, can significantly benefit from the
assistance of the receiving regulators’ innovation hub. Allowing for referrals, also
in order to participate in the testing environment of another regulator, makes
entering another financial market and a foreign jurisdiction easier and the sub-
sequent authorization (ideally) faster. Thus, from the perspective of fintech busi-
nesses, bilateral fintech cooperation agreements are a step towards encouraging
innovative solutions in the provision of financial services and building a basis for
a more competitive financial system.
From the regulators’ perspective too, bilateral fintech cooperation agreements
can help in mastering the regulatory challenges that competent authorities have to
consider within and across their boundaries alike.164 These agreements contribute
to the need for legal certainty, clarity, and predictability. First, they arrange for
161
Exemplary, FCA-ASIC agreement of 2018 (n 122), clause 7.3.
162
Exemplary, ibid., clause 7.4 and AMF-CSRC agreement (n 128), Article 6, clause 3.
163
FCA-ASIC agreement of 2018 (n 122), clause 8.3; HKMA-FINMA agreement (n 134), clause 8.3.
164
However, in view of the limited public access to information about how extensively it has been
complied with existing cooperation agreements so far, it is not possible to evaluate their effect-
iveness based on results; the confidentiality provisions, in the cooperation agreements further bar
the way to useful information, cf. L. Bromberg et al. (n 1), 17.
Rev. dr. unif., Vol. 24, 2019, 367–395

392 Petja Ivanova
communication not only between regulators but also of regulators with fintech
businesses, while the former provide the latter with regulatory support and guid-
ance through the established innovation functions—for example, innovation

hubs. Second, bilateral cooperation agreements are likely to counteract preferen-
tial treatments165 regarding the participation in a regulatory sandbox because
innovator businesses have to satisfy only the criteria for support set by their
own—the referring—authority. Third, as bilateral cooperation agreements
enable international coordination among regulators, they may also, in the long
run, ease the alignment of different regulatory and legal frameworks directed at
the same fintech solutions. Thus, the obstacle of possible regulatory competition
can be overcome.
However, whether cooperation and coordination between domestic regulators
based on bilateral fintech cooperation agreements are fully effective in the end is
doubtful. A deficiency of these agreements is that they are not far-reaching frame-
works. They establish only a statement of intent rather than a firm commitment,
and neither contain legally binding provisions nor create enforceable rights. The
consequent use of regulatory mechanisms provided in the agreements strongly
depends on the regulators’ willingness and abilities.166 Whether every regulator,
likewise, will be willing to use referral mechanisms and share information is
questionable. Not only might conflicting national preferences be a hurdle,167
but coming to an agreement at all can fail due to particular legal obstacles, to
the regulators’ reluctance to assign their control, or to their responsibilities to
another regulator or by reason of lacking resources.168
Furthermore, bilateral fintech cooperation agreements cannot remove the exist-
ing differences in domestic laws and national regulatory requirements.169 Rather,
they operate subject to the domestic laws and regulations of each authority that is
party to the agreement and do not modify or supersede laws or regulatory re-
quirements in force in one of the jurisdictions involved. For example, a fintech
business that meets the qualifying conditions may be granted support from a
domestic innovation hub after being referred by its home regulator, while it may
not be granted a license to operate in the receiving foreign jurisdiction because of
different conditions applying to authorizations than those valid for obtaining
support.170
In spite of their focus on information sharing and mutual assistance between
regulatory authorities, bilateral fintech cooperation agreements primarily build
165
A. Didenko (n 1), 340.
166
Ibid., 18.
167
P.-H. Verdier, ‘Transnational Regulatory Networks and Their Limits’, 34 Yale Journal of Int’l Law
(2009), 113, 114.
168
Technical Committee of the IOSCO, ‘Principles Regarding Cross-Border Supervisory
Cooperation’ (May 2010), available at <https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD322.pdf>, 15.
169
170
FCA-ASIC agreement of 2018 (n 122) and ASIC-OSC agreement of 2016 (n 125), clause 5.5 in
each case.
Unif. L. Rev., Vol. 24, 2019, 367–395

on the idea of supporting fintech businesses and, thus, of fostering competition171

in the interest of investors and consumers. Cross-border fintech regulation based
on these agreements, above all, addresses the emerging technologies in finance

themselves. In contrast, it does not address possible adverse impacts of fintech
solutions on the financial sector. Undeniably, regulators who have entered into
bilateral fintech agreements benefit from broadening their understanding of how
innovative technologies and business models function and how they interact with
the regulatory frameworks involved. Identifying fintech players and their market
behaviour and controlling them might be facilitated. In this respect, bilateral
agreements, at least partly, address the challenge of information asymmetries in
the fintech domain and can help in establishing a well-functioning monitoring
system. And, yet, the emphasis on promoting innovation itself seems to shift the
regulatory focus away from possible risks caused by the effects of fintech, espe-
cially with a view to increasing cross-border activities.172 Despite the high stand-
ardization that is reached in bilateral cooperation agreements up to now, their
large number results in the wide transnational support of emerging innovations.
In turn, the range of new entrants in financial markets and potential new subjects
to financial regulation increases as well as the already fast pace of innovation
accelerates. As a result, more profitable and competitive markets might be pro-
moted, but, at the same time, so are fintech’s disruptive characteristics, which can
adversely affect the financial system. The decentralized and disaggregated struc-
ture of fintech, for instance, is rather fortified and the power of borderless plat-
forms and the easy and low-cost market access further strengthened.
Making financial markets act more competitively and work better by boosting
the level of technology-enabled financial services is one side of the coin, ensuring
consumer and investor protection and market integrity is the other. By which
regulatory means173 the right balance can be found remains to be seen.
B. Improving cross-border cooperation and fintech regulation

Since not every domestic regulator has entered into an agreement, the benefits of
regulatory cooperation and coordination could be strengthened if agreements
were reached on a multilateral level or if the initiative of a cross-border regulatory
171
D.W. Arner/D.A. Zetsche et al. (n 8), 53, however, underline that the key of ‘smart regulation’ (n
111) is not to regulate technological innovations by forcing them but rather competition by
lowering entry barriers for innovative businesses while keeping risk controls intact. Moreover,
they introduce the term of ‘technological neutrality’ after which regulators should not seek to
‘regulate’ technological innovations. Instead, they should look at how technology enables a pro-
cess with an outcome that ought to be subject to regulation and consider the effects and risks of
innovations.
172
With this in mind, the author herein subscribes to the statement by Professor Rodrı́guez de las
Heras Ballell in her presentation (n 40) that we do not need to regulate new technology itself but
its consequences.
173
See Ch. Brummer/D. Gorfine (n 13), 6–14, who provide a menu of regulatory approaches, prin-
ciples and processes in order to evoke a more robust consideration of modern theory of regulation
that can effectively achieve core regulatory goals.
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394 Petja Ivanova
sandbox174 was introduced.175 And, yet, insofar as cooperation between autho-

rities that are parties to bilateral agreements is maintained effectively on the side
of both regulators, these agreements have the potential to support the design of a

more dynamic, responsive, and foresighted fintech regulation.176
At this stage, bilateral cooperation agreements offer regulators a worthwhile
and adequate opportunity to exchange and discover different regulatory hand-
lings as well as to establish contact with fintech industry players. And already
asking for transnational standards equilibrating all regulatory objectives with
regard to fintech might be too hasty. But it should not be ignored that the
more innovation is promoted through the regulatory mechanism of referral
and the instruments of innovation hubs and sandboxes, the more the scope of
regulatory oversight is widened and the more it is difficult for transnational
regulation to catch up. For the benefit of a profitable and safe financial system,
along with cooperation and coordination instruments for supporting innovation,
it is equally important to work on regulatory solutions for cross-border risk
management. Elaborating clear-cut rules or principles for rights and obligations
arising out of fintech transactions, or, in cases of, in particular, cross-border
insolvencies, is also essential.
Lastly, considering that fintech does affect the banking sector and in light of the
interrelation between conventional financial institutions and fintech businesses,
regulation should not fully avert its gaze from traditional financial institutions
while focusing on the fintech domain.
IV. Concluding thoughts

Innovative technologies in the financial sector are constantly on the move and
keeping up with their dynamics in regulation represents a challenge. At this stage,
fintech regulation is taking its first steps and passing through an experimentation
phase in which nourishing cooperation will give regulators the necessary flexibil-
ity to exchange information and regulatory know-how. Regulators can build light,
mutual dependencies in favour of innovation and competition at the cross-border
174
L. Bromberg et al. (n 1), 22.
175
In this sense, the proposal by the FCA in February 2018 to establish a global sandbox that allows
fintech businesses to undertake tests in more than two different jurisdictions at the same time
stimulated consultations on the creation of a Global Financial Innovation Network (GFIN), see
Consultation Document (August 2018), available at <https://www.fca.org.uk/publication/con-
sultation/gfin-consultation-document.pdf>. The GFIN, a collaborative knowledge sharing open
initiative, was formally launched in January 2019 by an international group of financial regulators
and related organizations, see announcement by the FCA that lists all members as well as those
participating in the new cross-border trials, available at <https://www.fca.org.uk/firms/global-
financial-innovation-network>. This new practical method of regulatory cooperation in innov-
ation matters (i) acts as a network of regulators to collaborate and share experience of innovation
in respective markets, including emerging technologies and business models, and providing ac-
cessible regulatory contact information for firms, (ii) provides a forum for joint regtech work and
knowledge sharing, and (iii) offers firms an environment in which to trial cross-border solutions,
see GFIN’s three primary functions, ‘Terms of Reference for Membership and Governance of the
GFIN’, available at <https://www.fca.org.uk/publication/mou/gfin-terms-of-reference.pdf>, 1.
176
Unif. L. Rev., Vol. 24, 2019, 367–395

level while still being able to work on their own regulatory and legal fintech
framework, considering their individual concerns at domestic level.
Is it time for harmonization and would a hard law regulatory solution be a

better fit than a soft law approach in the long term?177 It is too early to decide in
this respect. And, yet, in light of the speed at which fintech is developing and
considering the opaque structure of the overall fintech sector, a treaty-based
approach to fintech would hardly be in the interest of the dynamic requirements
that regulation has to satisfy. The harmonization of international standards in the
future,178 decisively shaped by principles set by regulatory networks, is desirable
and conceivable. As for now, bilateral fintech cooperation agreements will en-
hance cross-border cooperation and coordination between domestic regulators.
Based on the intent to provide fullest mutual assistance, they define how to deal
with emerging technologies seeking to enter the other’s market. Certainly, these
agreements promise to help further expand transnational cooperation—for in-
stance, through multilateral arrangements. However, it is doubtful if fintech co-
operation agreements, as they exist so far, can counter the disruptive
characteristics of fintech, which might generate risks for financial stability. The
current innovation-promoting regulations, by means of bilateral cooperation
agreements,179 might advance significantly quicker than the no-less-necessary
adjustment of existing regulations or the creation of new fintech-specific regula-
tions and laws that deal with fintech’s effects. Regulating fintech, even more in a
cross-border context, is a complex endeavour, appearing to be a race against time.
Therefore, transnational cooperation agreements on a bilateral basis cannot be
deemed the right way to go in cross-border fintech regulation but, rather, the
right way to enhance cooperation among regulators and to promote and sharpen
the awareness of emerging technologies in the financial sector—the right way that
forms a basis of transnationally shared experiences that regulators can build on
when further developing their regulatory and legal frameworks and working on
international regulatory standards for fintech’s implications.
177
These unanswered questions were also raised by Professor Gullifer in her presentation on ‘The
holding of crypto-currencies by custodians’ at the 10th TCL Teachers Conference on 18 October
2018.
178
L. Bromberg et al. (n 1), 24.
179
In addition, the meanwhile launched GFIN (n 175) also needs to be considered.
Rev. dr. unif., Vol. 24, 2019, 367–395

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Cross-border regulation and

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! The Author(s) (2019). Published by Oxford University Press on behalf of UNIDROIT.

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The risk of disruption, formerly attributed to traditional large financial insti-

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II. Setting the scene

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B. Main areas of fintech activities

(i) Virtual currencies

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compulsory acceptance.19 The European Anti-Money Laundering Directive de-

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Thereby, virtual currencies should not to be confused with electronic money.21

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Equity-, reward- and donation-based crowdfunding

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(iii) Digital asset management

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robo-advising41 renders the amount and form of services offered by robo-

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2. Embracing fintech in cross-border regulation

A. What is meant by regulation?

(i) Components of financial regulation

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rule making, supervision, certification, or enforcement.52 After deciding on a

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(ii) Focus: transnational regulatory cooperation and coordination

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guaranteeing fair, transparent, and efficient markets, and, ultimately, maintaining

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B. Need for cross-border regulatory mechanisms in relation to fintech

(i) Financial stability as a key concern?

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with ‘too-big-to-fail’ institutions,65 could also be linked to ‘too-small-to-distress’

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associated with transactions in P2P lending or equity-based crowdfunding. The

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(ii) Obstacles to an effective fintech regulation

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Overcoming information asymmetries

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worth exchanging.93 Moreover, cooperation and coordination between regulators

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Finding a regulatory equilibrium

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remove this tension without running into danger of under-regulating is hard to

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Impact on traditional financial institutions

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Determining cross-border risks

(iii) Opportunities for fintech regulation

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