It is of concurrence that the core object of law is to function as a regulatory mechanism to keep checks and balances on the conduct of human activities. While humans are ever evolving, law must strive as an organic institution to adapt to the dynamicity of human life form in all its spectrum. The concept of invention, technology and innovation have been brought under the umbrella of law through various intellectual property laws such as patents, copyrights, trademarks etc. Similarly, prior to digitalization, the financial system existed in the physical domain. These were regulated through the laws of the land, the guidelines of Central Banks and a chain of financial laws.
The transformative concept of Financial-Technology (FinTech) is the integration of financial services with technology. It has given rise to digital financial models thereby facilitating ease and instant transfer of funds, which warrants legal enactment/s to extend the legal umbrella to include the rising technology. The concept of fintech is very distinct in its character as it exists in the cyber domain thereby, crossing the borders of various sovereigns. This fact makes it a part of the global arena and qualifies it as a global phenomenon.
At this juncture, I would like to quote Barry Steinhardt, “Technology is outpacing the law”, which is very relevant at this point due to the fact that, notwithstanding any law enacted by any State, the State laws have no value of judicial enforcement in the international legal sphere. This is because of the principle that the laws of one sovereign State shall not overrule the sovereign of other State/s and hence leads to the rise of conflict of jurisdiction and application of law.
- The Jurisdictional Enigma
International Law, since inception, is subjected to the dilemma of jurisdiction of laws. Any violation in the international sphere necessitates the analogous functioning of the laws of multiple Sovereign States. This poses the problem of determining the scope and extent of applicability of the laws of affected States. There also exists the problem of difference in both the judicial setup and of the jurisprudence.
The stand point of international law relating to the jurisdictional dilemma stands the same as it was in Lotus Case. The Permanent Court of International Justice (PCIJ) held that each of the affected State has the right to apply the laws of its sovereign because the customary international law does not curtail a State’s sovereign power to that effect. Subsequently, a limitation was also placed on the extent of extraterritorial application of the law of a State for acts commissioned within the territory of other State/s.
On applying the above conception to fintech, every State is entitled to apply and enforce its laws on occurrence of contraventions which leads to an absurd solution. This is prevalent due to the fact that the fintech exists in the cyber space, thereby penetrating the sovereign territory of the globe. The ultimate problem of international dispute resolution would fall onto to two aspects, ‘jurisdiction to prescribe’ and ‘jurisdiction to enforce’ wherein, even if a competent court passes an order prescribing against a fintech provider established outside the country, the enforcement of the order depends on the laws and the co-operation of executory bodies of the country wherein the fintech provider is based in. This calls for the intervention of diplomatic route and law to ensure an exhaustive resolution.
This can be observed in the extraterritorial application of Section 75 of the Information Technology Act, 2000 of the Indian legislature wherein, though extraterritorial application of the act mandates the interference of diplomatic channels for purposes of enforcement.
- International Models
A brief overview of some of the international regulatory models advocated across the international legal sphere are analyzed in this section.
- The Joint Supervision (Basel Concordat Model)
This is a system of regulatory framework developed by the Basel Committee on Banking Supervision (BCBS), a unit of the Bank for International Settlement (BIS). Under this system, the fulfilment of solvency and liquidity requirements of financial institution on a consolidated basis is controlled by the supervisory authorities of the home country. The supervisor of the host country, in which the financial institution is active, controls the conduct of such institutions. It further warrants the adoption of a re-localization model for the fintech providers to ensure a regional exclusive service which would cripple the very development of the technology. Another challenge is relating to the conflict of the legislative intent of the host and home countries.
- European Union Models (EU)
Passporting – In this model, the acts adopted by financial authorities of one jurisdiction is recognized by the institutions of other jurisdictions through passporting. This enables the registered firm to operate in the European Economic Area (EEA) without need of any further authorization or licensing. The trojan-horse of this model is the possibility of regulatory competition to attract firms for registration in laxest jurisdiction.
FinTech Action Plan, 2018 – The EU Parliament in its detailed action plan dated 8th March 2018, has set out 19 comprehensive steps. It includes promotion of innovative business models, increase in cybersecurity, consumer and data protection etc. Additionally, it envisages the introductionof ‘regulatory sandboxes’ wherein the fintech provider will be allowed to test out the business model to a limited and regulated consumer base, thereby creating a safe space for experimenting start-ups.
- Unilateral Recognition (Substituted Compliance or Equivalence)
Under this model, a state may unilaterally exempt the foreign service provider from the application of its rules on the basis that the foreign service provider is subject to a comparable regulation in its home country. This is known as ‘substituted compliance’ in the US and as ‘equivalence’ in the EU. Though similar to passporting, this may result in evasion due to the limitations of the framework in the home country.
- The IBRD Model
The International Conference on FinTech held in the World Bank in May, 2019 recommended for the establishment of tech-neutral SupTech (Supervisory Technology) & RegTech (Regulatory Technology) to ensure a facilitative self-regulation model within the industry. This may sound promising but, the laws governing the RegTech de novo falls victim of the jurisdictional dilemma.
- BitLicense Model (New York)
It is one of the models introduced by the New York State Department of Financial Services (NYSDFS) in August 2015. It mandates any person engaged in virtual business activity to obtain license from the competent authority subject to disclosure of business information including structure, profit model, website addresses, jurisdictions etc. Quite a promising model but, cursed with the drawback of optional licensing.
Conclusively, the above models do promise effective measures but is deterred by the same challenge of international law, being lack of uniformity. As a utopian setup, the combination of the BitLicense and IBRD model accompanied by a supplementary international framework to facilitate the same would result in an effective, organic and adaptive international legal framework towards integrating fintech under the international legal sphere. This makes the international laws effective, as opposed to John Austin’s critics on it not being a law due to lack of sanction.
- Barry Steinhardt, Former Director of the American Civil Liberties Union’s Program on Technology and Liberty.
- The Case of S.S. “Lotus” (France V. Turkey) 1927 P.C.I.J. (series A) 9.
- IT Act, 2000 – https://www.indiacode.nic.in/bitstream/123456789/13116/1/it_act_2000_updated.pdf
- Basel Committee on Banking Supervision (BCBS), Consolidated Supervision of Banks’ International Activities – https://www.bis.org/publ/bcbsc112.pdf (last visited Sept. 11, 2022).
- EU Single Passport in Financial Services – https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/599267/EPRS_BRI(2017)599267_EN.pdf (last visited Sept. 11, 2022).
- EU FinTech Action Plan, 2018 – https://finance.ec.europa.eu/publications/fintech-action-plan-more-competitive-and-innovative-european-financial-sector_en (last visited Sept. 11, 2022).
- Alexey Artamonov, Cross-Border Application of OTC Derivatives Rules: Revisiting the Substituted Compliance Approach.
- The World Bank International Conference on Fintech, 2019 – https://www.worldbank.org/en/events/2019/05/22/international-conference-on-fintech#2 (last visited Sept. 12, 2022)
- N.Y. Comp. Codes R. & Regs. Tit. 23, § 200.3.