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BLOCKCHAIN, FINTECH AND THE LAW José Manuel Martínez Sierra (Director)

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BLOCKCHAIN, FINTECH AND THE LAW

Coordinator Rodrigo Cetina Presuel Authors Rodrigo Cetina Presuel Eloi Colldeforns Papiol Juan Carlos Coloma López Elizabeth Ferrie Lea Hungerbühler Manuel Jesús Martínez López José Manuel Martínez Sierra Ignacio Orellana García

Blockchain, Fintech and the Law explores the exciting possibilities of new financial technologies, including, but not limited to the use of blockchain, and the regulatory and legal implications of Fintech from different perspectives. This volume will be of interest to legal experts, law students and the general public looking to learn about various topics related to Fintech and its current regulatory realities, covering areas such as smart contracts and blockchain, cryptocurrencies and AI-fueled markets, financial inclusion of refugees, as well as marketplace lending, money laundering or regulatory sandboxes. The book also alerts of the challenges to human rights that Fintech can pose, including breaches of privacy and personal data protection, as well as financial and banking exclusion of vulnerable populations, discrimination and bias in marketplace lending and other problems related to the use of technology for financial services. Each chapter contains works by current and former Harvard University Faculty and Harvard Law School researchers as well as recent graduates from Harvard Law School’s LLM and JD programs. These legal scholars have converged through the Harvard European Law Association and the Harvard Law School Blockchain and Fintech Initiative to deliver a work of reference for emerging topics in Fintech and blockchain regulation.

BLOCKCHAIN, FINTECH AND THE LAW PRESENT AND FUTURE LEGAL CHALLENGES FOR CRYPTOCURRENCY AND TECHNOLOGY-DRIVEN FINANCIAL INNOVATION

COMITÉ CIENTÍFICO DE LA EDITORIAL TIRANT LO BLANCH María José Añón Roig

Javier de Lucas Martín

Ana Cañizares Laso

Víctor Moreno Catena

Catedrática de Filosofía del Derecho de la Universidad de Valencia Catedrática de Derecho Civil de la Universidad de Málaga

Jorge A. Cerdio Herrán

Catedrático de Teoría y Filosofía de Derecho Instituto Tecnológico Autónomo de México

José Ramón Cossío Díaz

Ministro en retiro de la Suprema Corte de Justicia de la Nación y miembro de El Colegio Nacional

Eduardo Ferrer Mac-Gregor Poisot Juez de la Corte Interamericana de Derechos Humanos Investigador del Instituto de Investigaciones Jurídicas de la UNAM

Owen Fiss

Catedrático emérito de Teoría del Derecho de la Universidad de Yale (EEUU)

José Antonio García-Cruces González

Catedrático de Derecho Mercantil de la UNED

Luis López Guerra

Catedrático de Derecho Constitucional de la Universidad Carlos III de Madrid

Ángel M. López y López

Catedrático de Derecho Civil de la Universidad de Sevilla

Marta Lorente Sariñena

Catedrática de Historia del Derecho de la Universidad Autónoma de Madrid

Catedrático de Filosofía del Derecho y Filosofía Política de la Universidad de Valencia Catedrático de Derecho Procesal de la Universidad Carlos III de Madrid

Francisco Muñoz Conde

Catedrático de Derecho Penal de la Universidad Pablo de Olavide de Sevilla

Angelika Nussberger

Catedrática de Derecho Constitucional e Internacional en la Universidad de Colonia (Alemania) Miembro de la Comisión de Venecia

Héctor Olasolo Alonso

Catedrático de Derecho Internacional de la Universidad del Rosario (Colombia) y Presidente del Instituto Ibero-Americano de La Haya (Holanda)

Luciano Parejo Alfonso

Catedrático de Derecho Administrativo de la Universidad Carlos III de Madrid

Tomás Sala Franco

Catedrático de Derecho del Trabajo y de la Seguridad Social de la Universidad de Valencia

Ignacio Sancho Gargallo

Magistrado de la Sala Primera (Civil) del Tribunal Supremo de España

Tomás S. Vives Antón

Catedrático de Derecho Penal de la Universidad de Valencia

Ruth Zimmerling

Catedrática de Ciencia Política de la Universidad de Mainz (Alemania)

Procedimiento de selección de originales, ver página web: www.tirant.net/index.php/editorial/procedimiento-de-seleccion-de-originales

BLOCKCHAIN, FINTECH AND THE LAW PRESENT AND FUTURE LEGAL CHALLENGES FOR CRYPTOCURRENCY AND TECHNOLOGY-DRIVEN FINANCIAL INNOVATION

Director

JOSÉ MANUEL MARTÍNEZ SIERRA Coordinator

RODRIGO CETINA PRESUEL Authors

RODRIGO CETINA PRESUEL ELOI COLLDEFORNS PAPIOL JUAN CARLOS COLOMA LÓPEZ ELIZABETH FERRIE LEA HUNGERBÜHLER MANUEL JESÚS MARTÍNEZ LÓPEZ JOSÉ MANUEL MARTÍNEZ SIERRA IGNACIO ORELLANA GARCÍA

tirant lo blanch Valencia, 2022

Copyright ® 2022 Todos los derechos reservados. Ni la totalidad ni parte de este libro puede reproducirse o transmitirse por ningún procedimiento electrónico o mecánico, incluyendo fotocopia, grabación magnética, o cualquier almacenamiento de información y sistema de recuperación sin permiso escrito del autor y del editor.

En caso de erratas y actualizaciones, la Editorial Tirant lo Blanch publicará la pertinente corrección en la página web www.tirant.com.

©

©

José Manuel Martínez Sierra, Rodrigo Cetina Presuel y otros

TIRANT LO BLANCH EDITA: TIRANT LO BLANCH C/ Artes Gráficas, 14 - 46010 - Valencia Telfs.: 96/361 00 48 - 50 Fax: 96/369 41 51 Email:tlb@tirant.com www.tirant.com Librería virtual: www.tirant.es ISBN: 978-84-1397-653-2 MAQUETA: Tink Factoría de Color Si tiene alguna queja o sugerencia, envíenos un mail a: atencioncliente@tirant.com. En caso de no ser atendida su sugerencia, por favor, lea en www.tirant.net/index.php/empresa/politicas-deempresa nuestro procedimiento de quejas.

Responsabilidad Social Corporativa: http://www.tirant.net/Docs/RSCTirant.pdf

Index Introduction.............................................................................................

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How Blockchains and Smart Contracts have Changed How we Do Business: Legal Perspectives José Manuel Martínez Sierra Juan Carlos Coloma López I. INTRODUCTION..............................................................................

II. DISTRIBUTED SYSTEMS AND BLOCKCHAIN DEFINITION.....

A. Precursors and Properties of Distributed Systems.....................

1. Consensus Algorithms...........................................................

2. Classical Consensus Algorithms............................................

3. Bitcoin and Nakamoto Consensus........................................

III. PROPERTIES OF BLOCKCHAIN SYSTEMS...................................

A. From Classic Contracts to Smart Contracts................................

1. Approaching Smart Contracts: Classic Contracts................

2. Embedded contracts..............................................................

3. Smart Contracts.....................................................................

4. Pseudocode to Capture Contracts........................................

5. Ethereum...............................................................................

B. How Smart Contracts and Blockchain are impacting the Way We Do Business............................................................................

1. Evolution of governance through blockchain.....................

2. Blockchain-Drive Collaboration...........................................

3. Evolution of the middleman.................................................

4. Changes and Evolution of Embedded Contracts................

5. Blockchain and data and privacy rights...............................

6. Experiences in the Application of Blockchain and Smart Contracting............................................................................

C. The Boundaries of Smart Contracts and Blockchain................

1. Paradoxes around Blockchain Technology..........................

2. The Cost of Rewriting History..............................................

3. Turing-Complete Coding Boundaries..................................

4. The Limits of Tokenization of Assets in Certain Jurisdictions or Across Different Countries’ Legislations................

5. The Potential of Blockchain for Privacy and Personal Data Protection...............................................................................

IV. CONCLUSION: THE FUTURE OF BLOCKCHAIN AND SMART CONTRACTS.....................................................................................

References..........................................................................................

21 23 24 34 34 39 42 44 45 46 51 52 55 61 61 64 65 66 68 71 74 74 76 77 78 79 91 98

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Crypto-assets, Privacy Coins, and Money Laundering Regulations Elizabeth Ferrie I. INTRODUCTION..............................................................................

II. AML LEGAL LANDSCAPE...............................................................

A. International AML/KYC Compliance Regime..........................

B. United States AML/KYC Compliance Regime: Federal Regulatory Agencies.............................................................................

C. Federal Law/Regulations to Combat Money Laundering........

D. United States AML/KYC Compliance Regime: State Level......

E. European Union AML/KYC Compliance Regime....................

F. AML/KYC Compliance Regimes of “Lenient” Jurisdictions— Singapore, Hong Kong, etc.........................................................

1. Singapore...............................................................................

2. Japan.......................................................................................

3. Malta.......................................................................................

4. Hong Kong.............................................................................

III. HOW NON-CRYPTO AML COMPLIANCE WORKS......................

IV. HOW CRYPTO AML ENFORCEMENT WORKS, AS HIGHLIGHTED BY RECENT CRACKDOWNS..............................

V. PRIVACY COINS: NEW CHALLENGES FOR AML COMPLIANCE.......................................................................................................

A. The power of the blockchain to facilitate money laundering..

B. Cryptocurrencies with Enhanced Anonymity............................

1. Monero...................................................................................

2. Zcash.......................................................................................

3. Dash........................................................................................

4. Grin/Beam on Mimblewimble Protocol..............................

C. Cryptocurrency Exchanges with Enhanced Anonymity............

D. Response by Regulators...............................................................

VI. REGTECH SOLUTIONS TO PROMOTE AML COMPLIANCE....

A. Legal/Regulatory Recommendations for a Cryptocurrency Future...........................................................................................

B. Regulatory Sandboxes.................................................................

C. Enhanced Liability on Crypto Exchanges..................................

D. Self-Regulatory Organizations....................................................

E. Regulated ATS.............................................................................

F. Clearly Defined Frameworks for Specific Crypto Activities......

G. Coordination with international consortiums to adopt consistent regulations across borders...................................................

VII. CONCLUSION..................................................................................

References..........................................................................................

103 106 107 112 116 122 124 126 127 131 132 134 135 142 157 158 158 159 161 163 164 165 166 167 174 175 176 179 180 180 182 183 185

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Market Manipulation in the Age of Machines: an Analysis of two Trading Strategies Ignacio Orellana García I. INTRODUCTION..............................................................................

II. MAKING SENSE OF MARKET MANIPULATION..........................

A. The goals of trade practices regulation......................................

1. Market efficiency...................................................................

2. Market integrity and fairness................................................

3. Evaluating trading practice regulations...............................

B. The rationale behind market manipulation prohibitions........

C. Differentiating legitimate from manipulative practices............

1. The subjective approach: requiring proof of manipulative intent......................................................................................

2. The teleological approach: Kyle and Viswanathan’s definition as conduct that undermines both price accuracy and market liquidity......................................................................

3. The descriptive approach: Ledgerwood and Carpenter’s trigger-nexus-target framework.............................................

4. The holistic approach: Fox, Glosten, and Rauterberg’s four question test...................................................................

5. A three criteria manipulation assessment framework.........

D. Is market manipulation law outdated?.......................................

III. REVALUATING HIGH FREQUENCY TRADING STRATEGIES UNDER THE LENS OF MARKET MANIPULATION.....................

A. Manipulation through high-speed spoofing?............................

1. Effects on price accuracy and market liquidity....................

2. Profitability through a trigger-nexus-target pattern............

3. Distinguishing traits...............................................................

B. Is pinging manipulative?.............................................................

1. Effects on price accuracy and market liquidity....................

2. Profitability through a trigger-nexus-target pattern............

3. Distinguishing traits...............................................................

4. The pinging plus factor.........................................................

IV. CONCLUSION..................................................................................

Bibliography.......................................................................................

192 197 199 199 203 207 208 213 214 217 221 224 234 237 240 241 246 249 251 254 259 261 263 264 267 269

Drawing a Line in the Sand(Box): Challenges of Regulatory Sandboxes for Fintech Companies Eloi Colldeforns Papiol I. INTRODUCTION..............................................................................

II. WHAT IS A REGULATORY SANDBOX?.........................................

A. Concept........................................................................................

275 278 278

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Index

B. Guiding principles of regulatory sandboxes..............................

1. Technology neutrality............................................................

2. Proportionality/risk-based approach...................................

3. Market integrity and customer protection...........................

4. Transparency..........................................................................

III. FIVE KEY DESIGN CHALLENGES OF REGULATORY SANDBOXES.....................................................................................................

A. Statutory mandate.......................................................................

B. Openness of sandbox and eligibility requirements...................

1. Innovation requirement........................................................

2. Quantitative limits.................................................................

3. Subjective qualitative requirements......................................

4. Objective qualitative requirements.......................................

C. Regulatory relief..........................................................................

1. Need for relief within the sandbox.......................................

2. Scope of relief........................................................................

3. Non-waivable rules or standards...........................................

D. Additional safeguards and consumer protection......................

E. Cross-sectoral and international exportation............................

1. Sectoral distribution of financial supervision......................

2. Domestic scalability issues and territorial fragmentation of financial regulatory functions...............................................

3. International scalability issues...............................................

IV. CONCLUSION..................................................................................

Bibliography.......................................................................................

280 280 281 281 282 283 283 288 289 293 295 298 298 299 300 303 304 308 308 310 312 317 319

Financial Inclusion of Refugees in Switzerland: An analysis of financial exclusion of refugees in Switzerland and how this issue can be tackled Lea Hungerbühler I. INTRODUCTION..............................................................................

II. BACKGROUND.................................................................................

A. Definition of financial inclusion.................................................

B. International endeavors..............................................................

C. Lack of attention in industrial countries, especially in Switzerland...............................................................................................

D. Refugees in Switzerland..............................................................

III. OFFER OF FINANCIAL SERVICES BY SWISS BANKS...................

A. Methodology and restrictions.....................................................

B. Results...........................................................................................

C. Interpretation..............................................................................

IV. DEMAND FOR FINANCIAL SERVICES BY REFUGEES................

A. Methodology and restrictions.....................................................

B. Results...........................................................................................

326 328 328 330 338 340 343 344 345 346 348 348 349

Index

C. Interpretation..............................................................................

V. INTERMEDIATE CONCLUSION: GAP BETWEEN OFFER AND DEMAND...........................................................................................

VI. REASONS FOR THE GAP BETWEEN OFFER AND DEMAND....

A. Regulatory restrictions................................................................

B. Economic reasons........................................................................

C. Reputational concerns and historical reasons...........................

D. Isolation of Switzerland within Europe......................................

E. Reluctance on the demand side.................................................

VII. IMPLICATIONS OF FINANCIAL EXCLUSION FOR PERSONS CONCERNED....................................................................................

VIII. SUGGESTED SOLUTIONS..............................................................

A. Regulatory amendments.............................................................

B. Federal strategy for financial inclusion......................................

C. Increasing awareness with banks, society and refugees.............

D. Motivate innovative players.........................................................

E. Further proposals........................................................................

F. Intermediate conclusion.............................................................

IX. CONCLUSION..................................................................................

References..........................................................................................

11 349 350 352 353 356 357 359 360 361 367 367 370 371 372 376 377 378 390

Privacy and Data Governance Approaches in the US and the EU. A Marketplace Lending Perspective on Technology, Financial Innovation and Civil Rights José Manuel Martínez Sierra Rodrigo Cetina Presuel Manuel Jesús Martínez López I. INTRODUCTION..............................................................................

II. ORIGINS AND EVOLUTION OF P2P LENDING IN EUROPE AND THE US.....................................................................................

A. From P2P Lending to Marketplace Lending: a Dynamic Concept...............................................................................................

B. Roles of Marketplaces (3Ps): Profiling, Pricing and Proposing Matches. Personal Data, Technology and Conflicting Interests................................................................................................

III. PRIVACY AND DATA PROTECTION CONSIDERATIONS REGARDING MARKETPLACE LENDING PRACTICES IN THE EU AND THE US.....................................................................................

A. Specific Issues around Privacy and Data Protection in Marketplace Lending..............................................................................

B. Privacy and Data Protection Requirements for Marketplace Lending Platforms in the United States.....................................

394 398 398 405 413 416 421

12

Index

C. Privacy and Data Protection Requirements for Marketplace Lending Platforms in the European Union. The Case of GDPR............................................................................................

IV. CIVIL RIGHTS CONSIDERATIONS IN MARKETPLACE LENDING IN THE EU AND THE US: TECHNOLOGY AS A DRIVER FOR FINANCIAL INNOVATION… AND DISCRIMINATION?.....

A. Discriminatory Lending related to the Use of Big Data and Algorithms in Marketplace Lending in the United States........

B. GDPR and Discriminatory Lending related to the Use of Big Data and Algorithms in Marketplace Lending in the EU.........

V. CONCLUSIONS................................................................................

Bibliography.......................................................................................

428 438 441 444 449 453

Introduction Jose Manuel Martínez Sierra

Law is in constant evolution just like society is in constant evolution. One persistent concern as society advances is that the law changes slowly and thus, it is not able to keep pace. This worry is particularly evident when we talk about interactions between the law and new technologies. From the genesis of constitutionalism, the law has had the role of guaranteeing rights and keeping order in order to protect citizens in the face of new developments in both the public and the private spheres and fundamental rights have been —and continue to be— the cornerstone of the rule of law. Among the many challenges that law has to face in modern times, one of the most prominent has been its capacity to adapt to the regulatory needs of new and emerging realities without losing the focus on fundamental rights protection that are innate to their own existence, given their constitutional roots.

From a formal point of view, new technologies do not represent anything more than another stage in this evolution for the law. However, these technologies do represent qualitative challenges of a greater complexity, particularly because the kinetics of socioeconomic change they cause seem to move at a faster pace than before. At the same time, and looking at the other side of the coin, this new reality shows a greater capacity for the customization of the legal reality and can be an instrument that may not only play in favor of the law, but that may also look at the law to find better and quicker answers to the challenges that a new technological reality implies. This hypothesis, namely, that the technological reality poses a great challenge, but that at the same time, can help find solutions for the very same challenge is the question that this work seeks to answer. The way of doing this is analyzing the dialectical relation between law and technology in some of the most prominent areas.

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More often than not, law remains unchanged at its core, and it is the inputs of the law that are the ones that experience change.

New technologies can give rise to new fields of law entirely, or expand the object of the law, and affect its subjects in new, different ways, even if the law itself suffers no fundamental change, which means that the focus must be put on how it can better adapt to change. For example, as new technologies emerge, new grey areas in the law may be identified. Sometimes these are exploited in favor of more nimble change, and, in market economices —including their financial markets— often give rise to new opportunities that naturally, bring about new regulatory concerns.

Sometimes the concern is how to orderly regulate new markets in which technology plays a role, in ways that allow for the market to grow but also for the leveraging of advancements in favor of society as a whole. Often, the concern will be to develop a market that can be competitive but that at the same time complies with already existing regulation. Here, the law may also be aimed at striking a balance between the necessary regulation and the fostering of a true competitive market, in the sense that the domestic market is not hampered by local laws and can remain competitive at a regional and international level. Laws related to taxation and to combating potential misbehavior and crime will also play a role in this instance.

Market economies that eventually worry about the rights of citizens may lead society to identify new, potential harms to them and seek appropriate ways to protect them. Sometimes, the need to recognize a new right —aimed at protecting an underlying societal value— may be identified, and —oftentimes— a reinterpretation of existing rights seems enough to ensure protection in the face of new inputs.

Sometimes, it seems that technology does not fundamentally change much in terms of how an activity ought to be regulated but over time, new concerns will emerge. For example, as new technology opens up new markets or opens the possibility for new types of transactions, worries about who can access the technology,

Introduction

15

and thus the markets, the transactions and their benefits begin to emerge. The law may start to worry about who benefits, and who may be left behind if legislation were not there to level the playing field. Sometimes the law will need to worry about the trade-offs of applying new technologies. For example, thinking generally, the fields of AI and robotics give rise to concerns about employees whose positions may be displaced or made redundant by technology. Those worries are both related to the effects of technology itself, but also about the behavior of those that implement them.

A new market opened by a technological advancement may benefit new players but at the same time give rise to potential harms to others, including new potential for the infringement of human rights: within the context of financial technologies we can think of concerns related to privacy, or personal data protection (a relatively new right recognized in the Charter of Fundamental Rights of the European Union); we can also recognize concerns related to financial and banking exclusion as well as AI bias and discrimination, the digital divide, etc.

The exciting possibilities of new financial technologies, including, but not necessarily limited to, those powered by blockchain and its applications are at the center of this volume. Regulatory concerns along the lines we have described before are central to the analyses of different technological innovations explored in this book. So are concerns related to the protection of human rights and other rights of citizens, including analyzing challenges related to privacy, to financial and banking exclusion or discrimination and bias, identifying when technology gives rise to new problems and when it will simply exacerbate them, unless the proper regulatory safeguards are in place.

This volume collects works that approach various topics related to financial technologies and blockchain and their current regulatory realities. Areas covered include smart contracts and blockchain, financial inclusion and exclusion, marketplace lending, regulatory sandboxes, cryptocurrencies and AI-fueled markets. The chapters are the product of hard work by recent graduates from

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the Harvard Law School’s LLM and JD programs. Other contributions come from current and former Harvard Law School researchers and all of them have a point of origin in the work done at the Harvard European Law Association, the only student organization at the Harvard Law School that is focused on European Union Law, and the Harvard Law School Blockchain and Fintech Initiative. I have had the honor of being a Faculty Advisor for both organizations over the years.

All of the contributions reflect careful research by students and scholars and also reflect collaboration between the student organizations I advise at the Harvard Law School and the Minda the Gunzburg Center for European Studies where I have chaired different initiatives for almost a decade, including, among others, the European Legal Order seminar that fosters high level activities, research and collaboration, and by extension, European scholarship at Harvard. Readers will find that many of the authors in this volume give a significant amount of attention to European law and regulations and often approach American and European law, as well as international law, from a comparative perspective.

Chapter 1, co-authored by this writer and Juan Coloma, an emerging researcher in the field of smart contracts, focuses on the evolution from their conception to their most contemporary iteration, fueled by blockchain technology. The chapter can be understood as an introduction to smart contracts and their evolution as well as an introduction to blockchain systems as fundamental parts of smart contracting.

The chapter also traces the evolution of the governance of smart contracts through blockchain and explores how blockchain technologies drive collaboration, giving readers a clear picture of the impact of blockchains and smart contracts in the ways we do business today. The chapter also concerns itself with the potential impacts that blockchain and smart contracting can have for data and privacy rights both in a negative sense —how they can undermine these rights— and a positive one —how these technologies can be leveraged to better protect privacy and personal data. The

Introduction

17

chapter concludes by looking into the potential futures of blockchain as applied to smart contracts, not before taking a detailed look at its technological limitations.

The second chapter, authored by Elizabeth Ferrie, currently a practicing lawyer in New York and a JD from Harvard Law School concerns itself with money laundering regulations as applied to privacy coins and crypto-assets. The chapter begins by describing the international compliance regime, in order to then, take a look, from a comparative perspective, into American federal law and regulations as well as the American regulatory regime at the state level, the compliance regime of the European Union and the regulatory regimes of jurisdictions considered to be more lenient, such as Hong Kong or Singapore. The chapter then takes a look at Crypto AML enforcement and how it works, seeking examples in recent crackdowns as documented through various sources.

The chapter also takes a look at the challenges for compliance related to cryptocurrencies with enhanced anonymity and the regulatory responses to these. In its last part the chapter issues legal and regulatory prescriptions to better regulate the future of cryptocurrencies and takes a look at the current state-of-the-art of regulatory sandboxes, crypto exchanges, self-regulatory organizations as well as the need of coordination among international organizations in order to be able to achieve consistent and compatible international regulations.

Ignacio Orellana, an HLS LLM graduate and a lawyer explores trading strategies and market manipulation by fintech that fuels high speed trading in chapter 3. The chapter begins with an introduction to market manipulation and the rationales behind its regulation —specifically its prohibitions— by first analyzing the goals that trade practices regulation pursues, including market efficiency and market fairness and integrity. Then, the chapter spends time explaining the reader the differences between legitimate and manipulative market practices and those that may be prohibited by regulation. After systematically exploring all the possible approaches, a three-criteria assessment framework is

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proposed, and the author considers if market manipulation laws ought to be updated to better respond to current technological challenges.

The third part of the chapter focuses on a re-evaluation of high-speed trading strategies from the point of view of market manipulation and the author evaluates if certain practices such as high-speed spoofing and pinging constitute instances of market manipulation. The author not only identifies the distinguishing traits of each practice, but he also identifies the negative effects they can have on markets, including affecting market liquidity or price accuracy to then suggest, in the concluding part, where legislation that deals with market regulation ought to direct its efforts in the immediate future.

Chapter 4, by Eloi Colldeforns-Papiol, a Spanish lawyer working in one of the top law firms of the country and an LLM graduate, explores regulatory sandboxes for Fintech companies, a topic of particular relevance in Europe, and especially in Spain, given the recent Sandbox legislation that has appeared in the country. The author introduces the reader to the concept of regulatory sandboxes and the principles that guide them, namely, technology neutrality, market integrity and customer protection, proportionality/risk assessments, and transparency.

Chapter 4 also focuses on the key design challenges of regulatory sandboxes, including their statutory mandate; the eligibility requirements for being part of a sandbox; the justifications behind regulatory relief and the scope of such relief; safeguards and consumer protections as well as the challenges that regulatory sandboxes face in terms of domestic and international scalability issues, the territorial fragmentation of regulatory functions and the sectorial distribution of financial supervision. Chapter 4 ends up being pertinently prescient and important given recent developments in sandbox regulation and its implementation in Europe, particularly, as said, in the case of Spain.

Chapter 5 deals with a broader topic, in which technology plays a key role, but that can be understood as a persistent problem of

Introduction

19

banking and finance in liberal markets: financial exclusion of the most vulnerable sectors of society. Lea Hungerbühler, an expert in Swiss and EU financial regulation, with a special focus on crossborder business and FinTech, also a graduate of the Harvard Law School’s LLM program, is the author of the chapter which focuses specifically on the financial exclusion of refugees in Switzerland.

The chapter gives an introduction to the concept of financial inclusion and why this is a topic that does not receive significant attention in industrialized nations, particularly Switzerland.

The chapter also overviews the current conditions of refugees in Helvetia and contrasts the financial services that Swiss banks offers with the financial needs of refugees, identifying gaps between offer and demand and investigating the reasons for the existence of these gaps. The chapter then moves on to analyze what are the consequences of financial exclusion for refugees and proceeds to offer possible solutions: regulatory amendments, federal policy strategy, work to be done by civil society, banks and refugees themselves and the role that technology and innovative partners can play, leveraging fintech solutions in order to achieve greater financial inclusion of vulnerable groups which makes this chapter a very important contribution within the context of an understudied area of finance, particularly in relation to fintech.

Finally, the last chapter, co-authored by myself, Rodrigo CetinaPresuel, a current researcher at the Harvard Law School and Manuel Martínez-López, a lawyer and former visiting researcher at the Harvard Law School deals with the potential and challenges of marketplace lending, particularly focusing of the benefits of innovative fintech as applied to access to credit —focusing specially in the role of AI and big data— as well as the potential harms, related to privacy, personal data protection and the risk of discrimination and affectations to civil and fundamental rights in the United States and Europe.

The chapter begins by introducing the reader to the concepts, origin and development of peer-to-peer lending in Europe and the United States and its evolution towards marketplace lending.

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The chapter then focuses comprehensively on privacy and data protection challenges related to marketplace lending, taking a comparative law approach in the EU and the US, identifying specific issues related to privacy and data protection in marketplace lending and the existing regulation governing marketplace lending on both sides of the Atlantic.

The chapter takes a look at civil and human rights concerns, particularly analyzing if marketplace lending is indeed a driver for financial innovation, but if this innovation comes at great cost as it opens up the door for new forms of discrimination in terms of fair access to credit. The chapter, continuing with its comparative law approach, analyzes what constitutes discriminatory lending practices under American law, particularly when big data and algorithms are used for marketplace lending activities in the US and also contrasts the use of these technologies with what the General Data Protection Regulation of the European Union currently mandates, identifying possible blind spots in the law as well as areas for improvement, both in terms of regulation and in terms of the practices of marketplace lenders that use these technologies.

All in all, this volume collects works that are the product of research and legal scholarship focused on recent technological challenges related to finance and their current regulatory status. Since some of these works were last updated in 2020, they do not reflect all regulation and jurisprudence that has changed or emerged since then. Nonetheless, the analysis and conclusions of all cases presented in this book remain valid, accurate and true. Many of the issues addressed are related to the regulatory challenges related to fintech innovation, both in terms of how they ought to be regulated in ways that help these technologies and the markets they impact develop in healthy ways —increasing competition or access, preventing crime or promoting inclusion of vulnerable groups— as well as the challenges related to the protection of fundamental rights when these technologies could affect them directly, for instance, when they may end up causing discrimination or fostering invasions to privacy and the misuse of personal data.