“FinTech” has become an inescapable buzzword in the last few years: the term is popularly used to describe those internet- and smartphone-enabled financial innovations that have risen to prominence since the 2008 financial crisis. This new era of FinTech is marked by the speed of technological change and the range of new entrants in the financial sector, including FinTech start-ups, as well as information technology and data-rich firms. In this context, there are new opportunities for innovation and growth and new challenges, particularly for lawmakers and regulators.
FinTech is not just about high-end technologies for advanced financial services, nor is it the exclusive preserve of developed jurisdictions. Financial innovation has been transformative in emerging markets and, in many cases, FinTech has the potential to help developing countries leapfrog the more developed economies. The EBRD's Legal Transition Team supports regulators and lawmakers in our regions of operations with best-practice advice in deploying and regulating crowdfunding, innovative payment systems and blockchain solutions.
In 2018, the Legal Transition Team published two studies, aimed at assisting the lawmakers and regulators in EBRD’s region with the regulation in the areas of crowdfunding and blockchain-based smart contracts:
Regulating Investment – and Lending-Based Crowdfunding: Best Practices
Crowdfunding is being talked up as part of the Fintech “revolution” – the disintermediation of finance by ever-greater use of technology, and as a way to provide enough financing (at last) for SMEs and early-stage businesses in the economy. As with all investments, crowdfunding also entails a number of risks (such as project and liquidity risks, platform failure, cyber-attack) and concerns (for instance, investors’ inexperience, reliability of the investment, undisclosed conflicts of interest, etc.). But, with appropriate safeguards concerning investor protection, crowdfunding can be an important source of non-bank financing in support of job creation, economic growth and competitiveness.
Against this background, EBRD and Clifford Chance LLP have made recommendations on best practices for regulating investment- and lending-based crowdfunding platforms. Our recommendations are based on the analysis of the regulations of six jurisdictions: Austria, Dubai (DIFC), France, Germany, the UK and the US, which were selected to provide a cross-section of geographies, approaches and degrees of market maturity.
Drawing upon commonalities and best practices identified from across these jurisdictions, the report makes recommendations on the following key issues: (i) type of authorisation(s) required for the operation of platforms; (ii) capital and liquidity requirements; (iii) know-your-customer rules and anti-money laundering checks required; (iv) maximum size of offer/loan; (v) maximum investable amount; (vi) consumer protection measures, including type of investor disclosures; (vii) risk warnings; (viii) due diligence/pre-funding checks; (ix) conflicts of interest inherent in the crowdfunding platforms’ role; and (x) platforms’ governance requirements.
These recommendations should help lawmakers in the EBRD region be more comfortable with the formulation of the crowdfunding legislation. This in turn should give legitimacy to crowdfunding platforms, while ensuring adequate protection of investors.
Smart contracts: Legal Framework and Proposed Guidelines for Lawmakers
Smart contracts and distributed ledger technology have the potential to increase commercial efficiency, lower transaction and legal costs and increase transparency. But they also pose a number of challenges. For example, uncertainty around contract formation and in relation to how smart contracts will cope with instances of mistake, frustration or illegality.
The report, 'Smart contracts: Legal Framework and Proposed Guidelines for Lawmakers' provides a guide for lawmakers in considering these issues and seeking to create a legislative and regulatory framework that facilitates the appropriate use of smart contracts. It examines what smart contracts are and what functions they may perform. It then goes on to consider some key areas of law that are relevant to the use of smart contracts and provides practical guidance and recommendations for lawmakers when seeking to promote the use of smart contracts.
We have also created four animated videos that summarise the key points from this report and point you to the relevant pages of the report if you want to learn more.
What are smart contracts?
This video explains what smart contracts are and what types of transactions they are most suitable for.