«They say things are happening at the border, but nobody knows which border» (Mark Strand)
by Valerio Lemma
Abstract: This article analyzes certain questions raised about the definition of ‘fintech’ and its fundamental elements, in order to highlight that the evolution of the European regulation (of the internal market for capitals, banking and financial services) suggests that the path will continue through the use of new technologies in banking and finance.
In this respect, we focused on the key economic drivers and technological mechanisms of the market based financing, taking into account the results of the recent researches on the shadow banking system. This preliminary research suggests that the efficiencies of fintech should be the rationale for the development of the intermediation processes.
Summary: 1. Introduction. – 2. The need for protection (of investors in the aftermath of financial technologies). – 3. The use of cryptocurrencies (and the absence of relevant monetary implications). – 4. Concluding remarks.
1. Questions raised about the definition of ‘fintech’ and its fundamental elements require an analysis of this phenomenon from a regulatory perspective; the answers should consider the definitions provided by the international bodies and European authorities, from both private and public perspectives. In this respect, this research aims at promoting a debate on the possibility that the legal analysis of a wider application of financial technology will promote an increase in the efficiency of the market for capital.
In this context, US regulation (or deregulation) of Fintech offers a more comprehensive view of the relevant market. However, the scope of the aforesaid analysis shall take into account also the British approach to this topic, in the light of the Brexit perspective.
Nowadays, the recovery leads the financial markets to new equilibriums, and the operators are looking for new ways to improve the efficiency of banking and financial business. It shall be argued that fintech lies under the application of technological innovations to banking and finance, and such phenomenon requires specific rules to avoid asymmetries in the competition for providing banking and financial services. Therefore, any clarification would start from the actual rules set forth the fintech, and will head towards the market structure which results from the latest regulatory acts.
In this context, the regulation of technologies (and their application to improve the performance of financial activities) relies on the same principle set forth the traditional banking and financial services’ industry. Then, the necessity of understanding if these principles would be able to satisfy the need for protection of the investors.
Nowadays, several researches cast the doubts that ICT service provider are able to produce the same output of banking and finance, as well as that the shadow banking system satisfy the needs of several firms and savers (in the market for capital and investments). Therefore, further researches shall clarify if such alternatives (to banking and finance) are able to play in the market (reserved to banks and financial firms) for competing with regulated firms for the supply and demand of (investing or obtain) capitals. Indeed, we need to understand whether there are rights to protect, and then the role of the international bodies, national governments and central banks in the oversight of the financial innovation (i.e. new tools and instruments provided by the evolution of personal devices, network infrastructures and software).
In this way, we expect that in the next months the regulator will assess the suitability of the EU regulatory framework concerning fintech more generally and in particular their impact on the financial stability or the rights of individuals. Hence, any critical analysis shall take into account the ‘legal status’ of fintech firms, as this intensive use of techniques means that traditional rules should apply anyway, so the question is how the public supervisory mechanisms shall ensure an adequate level of protection to investors.
2. In light of the above considerations, the assessment of the need for protection shall focus on the role that commercial and merchant banks are playing in the technological environment, and then identify the legal requirements able to apply an accurate control over risk taking and moral hazards.
The key economic drivers and technological mechanisms of the market based financing – taking into account the results of the recent researches on the shadow banking system – would suggests that the efficiencies of fintech should be the rationale for the development of the intermediation processes. Therefore, any research shall aim at clarifying that the current legal framework allows a lawful use of technology, but cannot allow an escape from the standards set by the regulator for the performance of certain activities or services.
From a regulatory perspective, it is essential to outline that, given the efforts at the supra-national level (i.e. the ones consolidated in the recent European Commission’s Action Plan on Fintech, dated 8th March 2018), a coherent legal framework has not been established yet. This confirms the need for a specific legal analysis to support the forthcoming interventions, and that the importance of taking into account the externalities of the European Banking Union and their impact on the shadow banking system, having regard to the implementation of the Single Supervision Mechanism and the Single Resolution Mechanism.
According to this perspective, we expect that the regulator will be able to standardize the application of high-tech mechanism to the processes of financing and credit transformations, in order to manage the allocation of risks and benefits among the intermediaries and their clients.
At this stage, the scope of fintech regulation shall refer to the most recent application of engineering to the activities falling under the rules governing the techniques of asset management and banking, and their impact on the open market operations. In this context, there is the need for assessing the use of blockchain technology (and the relevant matters due to its applications), taking into account the EU and the US perspectives.
Notwithstanding the role of private law, good faith and dealing, public supervisor should assess the scope of the current need for transparency, having regard to the adoption of rules set forth both promoting the circulation of financial information and banning the use of bargaining power by one firm to exert influence over others. This would help in addressing the responsibility of individuals in developing the fintech business and its market, taking into account the sanctions provided in order to avoid that the outcomes of this business does not improve the common welfare.
In this context, the legal scholars should be in the best position for considering that fintech firms are applying new high-tech mechanisms to several stages of capital circulation. Therefore, they should raise specific questions concerning the need for regulating these firms, and then whether there is the possibility to set new principles (or rather the opportunity to recast the current ones) to ensure the safe and sound managements of the other people’s money. The answers to such questions shall asses the possibility that fintech businesses would not jeopardize capital markets and, therefore, that public intervention is due in case of asymmetries, market failures or sunk-costs. In this respect, the role of central banks and supervisory authorities would be justified, as well as the possibility of a reserve concerning the ‘high-tech service providers’ operating in banking or financial markets.
3. At this stage of the analysis, we believe that the scope of the previously mentioned researches shall include also the use of currencies alternative to those reserved to central banks legally entitled to issue banknotes. We are going to highlight the need for investigating the operators that digitally issue and withdraw cryptocurrencies (as well as any one that pretends to issue money outside the traditional monetary systems). The results for such researches concern whether (and how) governments should oversee the activities of these operators and start any further intervention in order to ensure the proper functioning of the monetary mechanisms. 
Notwithstanding virtual currencies should enter into circulation via retail trade, we should exclude that these could support lending or reimbursement of savings (or any other activity reserved to supervised firms). Furthermore, any money follows a specific path through the economy: people spend (online and in any other places that accepts virtual currencies) or deposit it (in any virtual warehouse eligible for such a goal).
In this context, a deeper analysis will be able to start from the status of the current regulation of the shared record-keeping and processing system or the large global ledger account as a form of public intervention aimed at reducing the regulatory asymmetries in the capital markets. This could lead to understand the need for other interventions (such as any improvement in the anti-money laundering regime of fintech firms) related to the regulation of the records made by every digital currency transaction that occurs (kept secure through cryptography).
In brief, we expect that the above-mentioned researches would verify the resilience of the financial system and the advantages due to the implementation of a mechanism which provides that if one party sends another party virtual currencies, then it will not send files from one party to another but it rather write the exchange down in a ledger (even if there is not a central authority or official body assigned with the task of updating a ledger and keeping track of all the transactions). This leads to an un-centralized system and a set of information shared among an indefinite number of private operators. Therefore, we will investigate the need for additional tools able to monitoring these multiple ledgers and their synchrony, taking into account the risk arising from the lack of safeguards when a digital currency transaction is made (which should be announced in the network so that particular transaction can be recorded by all the operators, making the ledger verifiable).
Therefore, the results of such researches will bear out if the public authorities can oversight a peer-to-peer network, being maintained in terms of strict protocols and multiple copies of the same ledgers. In addition, these should suggests to verify whether central banks can improve sovereign virtual currencies in the context of their traditional activity. We cannot exclude that national central banks will issue ‘public crypto-currencies’.
As a result, blockchain technology and cryptography are, in the context of fintech business, part of the foundational innovations underlying the development of the financial markets. Hence, it should be verified the need for new rules related to this technology and, furthermore, if them shall be able to ensures that (public or private) crypto-currencies will not put savings at risk, jeopardize the monetary policies or reduce transparency, security and efficiency (of transactions that occur in the capital market).
4. Concluding remarks highlight that the evolution of the European regulation (of the internal market for capitals, banking and financial services) suggests that the path will continue through the increase of fintech operations. At the current stage, we are considering the fintech business as the outcome of the deregulation process started in the twentieth century, and we expect to observe that it will be a box for a large number of firms aimed at playing in the shadow banking system. Strands of research will be both the understanding of the credit transformation processes that find direct execution on the financial market and the focus on high-tech operational forms that can make the capital circulate from subjects in surplus to others in deficit according to different parameters from those established by the prudential supervision.
 We shall move from the consideration on the ‘ ongoing changes’ to the current business models of fintech firms; see Engst – Lemma, Insurtech and interoperability of Fintech firms, in Open review of management, banking and finance, 2018, parag. 2 where it is highlighted that ‘regulatory issues are related to the algorithms supporting the partially automated activities in insurance undertaking (and other advanced technique of risk mitigation)’.
 Thus, the need for a clarification of the scope of our research with regard to the role of the public in this sector; see Cassese, Quattro paradossi sui rapporti tra poteri pubblici ed autonomie private, in Riv. trim. dir. pubbl., 2000, 390 ss.
See also Capriglione, Considerazioni a margine del volume: il tramonto della banca universale?, in Rassegna Trimestrale di Diritto dell’Economia, n.1/2018, p. 22 ff.
 See Engst – Lemma, Insurtech and interoperability of Fintech firms, in Open review of management, banking and finance, 2018, parag. 2 on the absence of significant changes of the national legislative framework, which ‘should suggest a complete freedom in starting up a fintech firm that would support the business of insurance companies or distributors’.
 See Banca d’Italia, FinTech In Italia. Indagine conoscitiva sull’adozione delle innova-zioni tecnologiche applicate ai servizi finanziari, December 2017; Panetta, L’innovazione digitale nell’industria finanziaria italiana, Milano, 26 september 2017; Bofondi, Il lending-based crowdfunding: opportunità e rischi, in Questioni di Economia e Finanza, n. 357, Banca d’Italia, March 2017, p. 7.
 See Capriglione, Etica della finanza mercato globalizzazione, Bari, 2004, Chapter V; see also Prasad-Rogoff-Wei-Kose, Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, LMF Occasional Paper, No. 220, 2003; Lastra, The Globalization Paradox: Review of Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy, International Journal of Constitutional Law, 2013, p. 809
 See Engst – Lemma, Insurtech and interoperability of Fintech firms, in Open review of management, banking and finance, 2018, parag. 2 on both the consideration that ‘the current legislative path for the adoption of a EU directive would not be timely for driving the innovation in this industry, anyway new rules should be able to set common standards (in order to ensure a fair competition in this market)’ and the doubt ‘that new technologies and different business models are spreading in the insurance business, so the monitoring of outsourcing (and then the perspective of certain developments in licensing the ancillary service provided to traditional insurance companies) should allow the starting of new form of supervision without jeopardizing the market for servicing’.
 See Financial Stability Board, FinTech credit Market structure: business models and financial stability implications, 22 May 2017
 See Simoncini, The Constitutional Dimension of the Internet: Some Research Paths, in EUI Working Paper Law 2016; Rosa, Social acceleration: ethical and political consequences of a desynchronized high-speed society, in Constellations, 1, 2003
 We shall consider that this article is influenced by the Italian approach to the regulation of money, in this respect see Ascarelli, La moneta, Padua, 1928; Savona, La sovranità monetaria, Rome, 1974; Stammati, Moneta, Enc. Dir., vol. XXVI, Milan, 1976; Capriglione, Moneta, Enc. dir., Milan, 1999, p. 747 ff. In h respect, please see also the approach of Keynes, A Treatise on Money, London, Macmillan, 1930, I, chapter 1; Kelsen, Il problema della sovranità e la teoria del diritto internazionale, Milan, 1989
 See Troisi, Crowdfunding e mercato creditizio: profili regolamentari, in Contratto e impresa, Padua, 2014, p. 525
 See Plassaras, Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF, in Chicago Journal of International Law, 14(1), 2013, p. 377 ff.; Pozsar, Shadow Banking: The Money View, 2014; Ricks, Regulating money creation after the crisis, in Harv. Bus. L. Rev., 2011, 1, p. 75 ss.
 See Nakamoto, Bitcoin: a peer-to-peer cash system, 2008; Troiano, FinTech tra innovazione e regolamentazione, relazione al convegno su «FinTech: prime esperienze e prospettive di regolamentazione», Roma, 4 dicembre 2017
 See Biferali, Big data e valutazione del merito creditizio per l’accesso al peer to peer lending, in Diritto dell’Informazione e dell’Informatica (Il), 2018, p. 487 ff.
 See Blemus, Law and Blockchain: A Legal Perspective on Current Regulatory Trends Worldwide, in Revue Trimestrielle de Droit Financier, 2017; Trautman, Is Disruptive Blockchain Technology the Future of Financial Services?, in The Consumer Finance Law Quarterly Report, 2016.
See also Hacker – Thomale, Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law, in European Company and Financial Law Review, 2018.
 The Euro was initially an electronic currency used by financial markets and for cashless payments (in 1999). Indeed, three years later, euro banknotes and coins entered into circulation in the form of physical notes, with physical security features regarding their authenticity (different from cryptography), paper or centralized ledgers (for dematerialized transactions) to ensure that payments are not made to different parties using the same money and the possibility to circulate or stoke them with the traditional mechanisms.
 See Engst – Lemma, Insurtech and interoperability of Fintech firms, in Open review of management, banking and finance, 2018, on the current lack of regulation, where the Authors concludes that it could allow to an alternative to insurance companies, as well as to banks and other financial intermediary; this also cast shadows on the efficiency of the market for risk and coverages and, therefore, on the whole capital market, because of the possibility that firms subject to different regulatory and prudential regimes can offer the same services (under different conditions)
 See European Commission’s Action Plan on how to harness the opportunities presented by technology-enabled innovation in financial services (FinTech), 8 marzo 2018.
Valerio Lemma is Full Professor of Law and Economics at the Law Faculty of Università degli Studi Guglielmo Marconi in Rome, and Coordinator of the Master programme in «Financial market regulation» at Luiss University.