The Regulatory Framework of Modern Financial Technology (FinTech)

Technological innovation plays a key role in the design and development of financial services and products. This development is captured by the term Fintech, which is used to convey a range of technological products, innovative applications, processes, and business models that are being developed in the banking and financial sector for the provision of banking and financial services. The interplay between finance and technology is not a novelty. The financial sector has always used technology and technological innovation as a tool to develop its business. Dematerialised securities, which have revolutionized the way financial services are provided, are a good example. The rapid development of modern technologies has changed the traditional communication structures used by financial service providers to get in touch with their potential customers, to negotiate and contract with them and, in general, to conduct their business. By exploiting the opportunities offered by modern technologies, innovative forms of business models have developed – they operate in parallel and in competition with traditional financial service providers.

At the same time, technological innovation allows the development of business ideas through the so-called start-up companies, which have a strong inherent element of risk, but are also associated with expectations of high profits. These technological innovations can be used in the wider business sector, including traditional businesses, amongst others for the development of environmentally friendly products and to support sustainable development and the transition to a circular economy that is safe, climate-neutral, resilient to climate change and more resource-efficient. These objectives are vital to ensure the long-term competitiveness of the European Union’s economy. The existence and enhancement of financial flows towards activities compatible with the development of low greenhouse gas emissions and resilience to climate change is an objective which the European Union has declared.

Technological innovation developments over the last fifteen years approximately have been tremendous. The so-called ”disruptive technologies” of the 4^th Industrial Revolution are giving rise to the development of new, innovative financial technology that is impacting traditional financial tools in the financial sector and dramatically changing the landscape of traditional and financial services. The financial sector has always been subject to regulation. The raising of capital from the investing public, its investment, and its use by professionals has always been associated with an element of risk. The use of technological innovation in the financial sector constitutes a new challenge. The globalization of the economy and the intensity of cross-border transactions make it unrealistic to refuse it. The challenges for the legislator are enormous. How does the legislator, both at the EU and the national level, deal with technological innovation in the field of financial services? What are the regulatory approaches to the emerging challenges? How intrusive is or should the legislator be with regard to the new products that are constantly being developed and launched on the market? Does regulation gasping follow developments or can it play a leading role in this direction? Does it facilitate or hinder technological development? How much does it help businesses and how does it protect investors? These questions, typical in the financial sector, are being asked anew in the face of new technological innovations and transactional practices. Where will legislators strike a balance between the objectives of ensuring the stability of the financial sector, protecting investors and fostering entrepreneurship? How will it address the risk of money laundering inherent in many of the new products?

The subject matter of this course is to present the problematic of technological innovation in the modern regulatory framework of financial services. After a general introduction, specific key examples will be presented, mainly related to the following topics:

I. Revolutionary technologies and financial technology (”Fintech”)

• Concept and examples of revolutionary technologies and Financial Technology as a revolutionary and explosive element in the provision of financial services
• Technologies of the 4^th Industrial Revolution

1. a) Artificial intelligence
2. b) Internet of Things
3. c) Augmented reality (Metaverse)
4. d) Biometrics, Cloud computing, Big Data

• Blockchain (DLT)

1. a) Disintermediation
2. b) Smart contracts
3. c) Decentralized finance (DeFi)

• The creation of new business models using Financial Technology – examples

1. a) Provision of financing outside the traditional banking system and development of alternative forms of financing (P2P lending /marketplace lending platforms, digital platforms / Innovation: financial institutions v. new entrants)
2. b) Crowdfunding
3. c) Forms of Funds for financing new business models and new financial products

• New infrastructures (Financial APIs, Mobile applications, Web-based solutions) and their mode of operation / need for legislative intervention or market regulation?
• The creation of new financial products through Financial Technology:

1. a) Digital coins
2. b) Cryptocurrencies
3. c) Payment services and payment systems.

II. The advantages and risks of new business models and new products of Financial Technology / Regulatory challenges and regulatory approaches

• Adequacy, gaps and the need to complement the existing institutional framework of the capital market and banking system (investment services, public offering, prospectus, provision of funding, payment systems, et.c.)
• The challenges and regulatory dilemmas:

1. a) Legislation (the risk of market strangulation and the risk of hindering the development of new products in case of over-regulation, effectiveness of legislation)
2. b) Self-regulation and self-engagement / the risks

• Security of transactions and the risk to financial stability
• Investor protection and market confidence – Examples: crowdfunding regulation, rules for raising funds from the public, prospectus costs etc. / advantages and disadvantages of the alternatives
• Personal data protection and privacy
• Promoting ESG / sustainability objectives
• Cross-border transactions (issues of applicable law and scope of restrictions)
• The risk of distortion of competition and discrimination in the European Union / level playing field
• Lack of harmonization at the European level, legal uncertainty and transactional uncertainty

III. The European Regulatory Framework

• The EU Digital Finance Strategy

1. a) Purpose
2. b) Priorities
   1. Removing fragmentation
   2. Adapting the EU regulatory framework to facilitate digital innovation

• Promoting data-driven innovation in finance

1. Addressing challenges and risks

• Regulation (EU) 2022/858 ”on a pilot regime for market infrastructures based on distributed ledger technology (‘DLT’)”

1. a) DLT Market Infrastructures
2. b) Requirements for the operation of DLT Market Infrastructures
3. c) Financial instruments subject to the pilot scheme
4. d) Entities that may apply for an operating license
5. e) Reporting and review

• Regulation (EU) 2023/1114 ”on markets in cryptoassets” (MiCA)

1. a) Main issues
   1. Transparency and disclosure requirements
   2. Licensing and supervision

• Function, organization, and governance of publishers

1. Consumer protection
2. Integrity of cryptoasset markets
3. b) Scope of application
4. c) ”Cryptoassets”
5. Utility tokens
6. Tokens with reference to assets

• Electronic money tokens

1. d) Obligations of issuers of cryptoassets
2. e) Obligations of service providers
3. f) Ensuring the integrity of the cryptoasset markets

• Regulation (EU) 2022/2554 on the digital operational resilience for the financial sector (DORA)

1. a) Subject matter and scope
2. b) Principle of proportionality
3. c) Information and communication technology (ICT) risk management
   1. Governance and organisation
   2. ICT risk management framework

• Prevention, treatment, and recovery
• Policies, procedures and training
• Event notification
• Testing
• Risk management framework for third-party ICT service providers
• Oversight framework for critical third-party ICT service providers

1. Exchange of information

• Directive (EU) 2015/2366 on Payment Services (PSD2)

1. a) PSD2 and open banking
2. b) To PSD3 and the Payment Services Regulation

• Directive (EU) 2011/61 on Alternative Investment Fund Managers and its supplementation
• FIDA Proposal – Framework for Financial Data Access
• Regulation (EU) 910/2014 on electronic identification and trust services for electronic transactions in the internal market (eIDAS)
• Directive 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (AMDL 5)
• Proposal for a Regulation on Artificial Intelligence

1. a) Main regulatory axes
   1. Adjustment according to the degree of risk
   2. Technological neutrality

• Horizontal application

1. Transparency
2. Accountability obligation
3. Extraterritorial application
4. b) A framework of ethical rules

1. Human activity and supervision
2. Technical robustness and safety

• Privacy and data management

1. Transparency
2. Diversity
3. Avoidance of discrimination

• Social and environmental protection conditions

IV. Greek law

• Law 4734/2020 on the prevention and suppression of money laundering and the financing of terrorism
• Law 4961/2022 on emerging technologies