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FINTECH 2021

The new Fintech 2021 guide covers 38 jurisdictions. The guide provides the
latest legal information on regulatory sandboxes; robo-advisers; online lenders;
payment processors; marketplaces, exchanges and trading platforms;
high-frequency and algorithmic trading; financial research platforms; insurtech;
regtech; blockchain; and open banking.



Last Updated: March 18, 2021

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Argentina
Belgium
Bermuda
Bosnia & Herzegovina
Brazil
British Virgin Islands
Cayman Islands
China
Cyprus
France
Ghana
Guernsey
Iceland
India
Indonesia
Ireland
Israel
Japan
Jersey
Kenya
Lithuania
Malaysia
Malta
Mexico
Netherlands
Nigeria
Philippines
Poland
Portugal
Russia
South Korea
Sweden
Switzerland
Thailand
Turkey
UK
USA
Vietnam

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AUTHOR


Lee A Schneider


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block.one is one of the world’s largest blockchain developers, author of the
EOSIO software and creator of Voice.

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Reconsidering Financial Privacy as the Custody of Informational Assets

The rise of fintech through the use of technologies to create and deliver
financial products and services in centralised and decentralised systems has
resulted in many benefits across the spectrum of assets and activities. It has
caused advancements in processes throughout the life cycle of finance, from the
moment the customer thinks about an investment, payment or other action until
the last piece of servicing is done by a financial institution even years later
and by an entirely unaffiliated entity. Operations, risk management, compliance
and regulation, including investigations and enforcement, have all seen impacts
large and small. In 2019, when the first edition of this guide was published,
this opening essay sought to define fintech and the role of lawyers in
representing fintech companies. The opening essay to the 2020 guide focused on
DeFi and a methodology for determining the legal classification of various
assets and items as well as the activities that characterise it.

Financial privacy as a goal

This year, the focus turns to the need for financial privacy as a core issue for
fintech firms and their counsel. Financial privacy is about the custody of
customer informational assets, which are a distinct asset class but inextricably
related to the customer’s financial assets. All customer assets, financial and
informational, deserve proper protections in order to create and enforce
financial security and economic inclusion. As such, financial privacy should be
a foundational goal of fintech. The next great fintech companies will
incorporate it into everything they do for their customers. Consider this a call
to arms!

Much has been written and said about financial privacy in a variety of contexts.
Some start with data security as the foundation, others express the notion of
“privacy by design” and try to define that term. Still others strongly advocate
for privacy but with broad exceptions for national security and the tracing of
criminal activity. Questions of privacy vis-à-vis different constituencies also
come into play, with the idea that rules should be different when protecting a
customer’s information from third parties, from other customers, from
competitors, from the fintech company and its service providers, and from the
government.

Rights and core values

Let us rethink these ideas by starting with the concept that financial privacy
is a right and a core value, perhaps not immutable but certainly deserving of
exceptional protections because the financial institution is holding customer
informational assets. This conclusion follows naturally from the way we treat
financial services regulation overall: the core values concern protecting
investors and other market participants from loss and theft of assets, from
fraud and inadequate disclosures, and from a myriad of bad actors and
activities. In jurisdictions around the world, these principles form the basis
of financial services regulation and impose important duties on all participants
with respect to their interactions with customers, each other and the markets in
general. We need look no further than custody rules and anti-fraud and market
abuse standards of most jurisdictions to see the vital importance placed on
protection of customer activities and assets. After all, people’s hard-earned
money is at stake.

Given the regulations and resources devoted to protecting investors against
fraud, manipulation, loss of assets and overall unfairness, we can conclude that
these are core values. Privacy should receive at least equal treatment. After
all, without privacy of information and identity, all of these other protections
are for naught. Put another way, the anti-fraud and abuse regulations and
custody rules are an extension of privacy because those things cannot matter in
the absence of privacy. As such, information is another asset deserving of at
least equivalent, if not heightened, protections.

Protection in the equity markets

Rules and regulations in the equity markets illustrate the point. They focus
heavily on protecting both financial and informational assets. There are rules
prohibiting disclosure of customer identity, size of customer trading interest,
trading on information improperly obtained from clients and others, and other
sorts of identity-revealing practices, and those rules apply before, during and
after each trade. Moreover, the assets acquired from trading must be properly
secured at an appropriately regulated custodian with obligations to protect
those assets from theft and loss. Without all these protections, equity markets
would fall apart because no one would feel confidence in the process or the
outcomes. Protection of informational assets is just as important as protection
of the securities traded. 

Financial security and participation in the economy

There is no reason that heightened privacy should be limited to equity trading
nor custody requirements to financial assets. When financial services companies
protect informational assets, the result is more fairness, better products and
services, and an improved financial system. More importantly, it helps create
financial security for customers. Financial security comes from knowing that
your assets, whether informational or otherwise, are safe. For example, if the
customer’s identity and financial information were known, they could be the
subject of physical attack, extortion, hacking and confidence games. If the
customer’s financial assets are not safe, they are subject to theft and loss.
There can be no financial security without the securing of both financial and
informational assets.

Going one step further, I submit that when people feel financially secure, they
participate in the economy to a greater degree. Not only do they have the money
to shop and vacation, but they think about starting their own business or
investing in ventures started by others. This type of economic inclusion is an
integral part of the virtuous cycle that grows an economy and a country and it
all stems from securing informational and financial assets to at least the same
degree.

A call to arms

Why a call to arms? There are two reasons. First, issues of privacy and data are
much in the news in other contexts, including questionable usage by companies
and platforms of customer information, attacks from hackers and breaches of
cybersecurity, and worries about artificial intelligence and machine learning.
Financial privacy should be part of these discussions to ensure proper
protection of customer informational assets.

Second, governments are demanding more financial information and reporting about
customer activities without a warrant or due process. Their justification is the
need to track the proceeds of criminal activity and funding of terrorism. While
undoubtedly important goals and I personally am virulently opposed to criminal
activity and terrorism, governments cannot forget that informational assets are
no less important or valuable to customers than financial assets. A government
cannot simply seize financial assets without appropriate proofs and process. The
same principles should apply to informational assets. A better balance needs to
be struck between legitimate law enforcement and improper government
surveillance.

As these two separate but parallel sets of discussions occur, fintech should
respond to both in ways that buttress rather than undercut the foundational
principle of financial privacy to reinforce financial security and economic
inclusion. As a result, I propose that fintech firms use privacy (protection of
informational assets) as the foundational principle for servicing their
customers. Design as many elements of your activities and user experience as
possible with privacy as the starting point, not as an afterthought or add-on.
Develop privacy-enhancing tools that your customers can use both on your
platform and as they reach the wider internet and world of digital commerce,
communications and recreation. Consider different approaches and techniques that
provide more protection through research and development efforts. Create a
fintech privacy foundation with the explicit goals of advancing a privacy agenda
and working on the tools that will power privacy in an era of bigger data,
quantum computers and public blockchains. We need to work together as an
industry to protect informational assets.

Conclusion

We face acute challenges in the area of privacy as a result of advances in
technology. Fintech and the broader financial services industry are not immune
from these issues. It is time to expend more effort on privacy as a foundational
principle of financial services in order to ensure the financial security and
economic inclusion that comes with it.


AUTHOR


Lee A Schneider


--------------------------------------------------------------------------------

block.one is one of the world’s largest blockchain developers, author of the
EOSIO software and creator of Voice.

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