Luxembourg National Research Fund

BACK TO RESEARCH WITH IMPACT: FNR HIGHLIGHTS

Prof Dirk Andreas Zetzsche from the University of Luxembourg spent three months in Sydney analysing different solutions.

Mobile payment solutions, crypto currencies, peer-to-peer-lending, distributed ledgers – these are only a few of the recent digital and technological innovations in the financial sector, referred to as FinTech.

As with the business models, the legal models also need to be adapted to FinTech. Financial regulators are increasingly seeking to balance the traditional regulatory objectives of financial stability and consumer protection with promoting growth and innovation. Does that mean we need a new law for FinTech?

Between February and May 2017, Prof. Dirk Andreas Zetsche, ADA Chair in Financial Law & Inclusive Finance at the University of Luxembourg, travelled to the other side of the world to start addressing this question.

Prof. Zetzsche, why did you choose Sydney as destination for your INTER Mobility?

“One goal of my research visit was to establish a long-term collaboration with Prof. Buckley at the University of New South Wales (UNSW) and expand my professional network. Prof. Buckley is a globally leading FinTech scholar with many connections in Australasia.

“Secondly, Australia functions as a role model for regulating FinTechs, having adopted a so-called ‘Regulatory Sandbox’ waiver approach, similar to the UK, but at the same time engaging in an vivid objective-based exemption scheme for innovative businesses. Regulatory sandboxes provide a framework in which firms can test innovative technologies with a limited number of real customers under regulatory exemptions.

“On the other hand, Australia is not subject to the sometimes burdensome European legislation. Together, this provided a good basis for a comparative legal analysis on how to deal with FinTech in the context of banks, asset management and investment funds, and on whether the regulatory sandbox is a useful policy tool or not.”

Which was one question of your research project. How did you get on with that?

“We did a major comparative and conceptual inquiry into the role of the regulatory sandbox covering 20 jurisdictions, including Luxembourg and Australia.

“It turned out that although the regulatory sandbox was implemented in Australia for three months, not a single firm actually opted into the scheme. We found that one reason for this could be that the Australian regulator ASIC frequently grants firm-specific relief. If the regulator is open for communication with entrepreneurs and responsive to innovative firm’s needs, the sandbox loses some of its burden-relieving appeal.

“This prompted us to look into functional complements to the sandbox, modifying the project into an analysis of Smart (financial) Regulation. In addition to sandbox schemes, we looked at new regulatory approaches, which range from doing nothing (partial removal of financial regulation), cautious permissiveness (on a case-by-case basis or through special charters) and the development of new regulatory frameworks. We developed a general theory of “smart regulation” of innovation.”

And what does this theory say? Is there one solution that is better than another?

“I published a joint paper with Prof. Buckley from Australia and Prof Arner from Hong Kong in which we argue for a new regulatory approach. Our new automated and proportionate regime builds on shared principles from a range of jurisdictions and supports innovation in financial markets. The fragmentation of market participants and the increased use of technology requires regulators to adopt a sequential reform process, starting with digitization, before building digitally-smart regulation. Our paper provides a roadmap for this process.

“In three months at UNSW Sydney, we wrote four papers that have been accepted for publication by decent US journals and world class journals in this field. I also presented the joint work at eight occasions in Sydney, Canberra and Melbourne, and since my return to Luxembourg, we presented the joint work more than three dozen times around the globe. The initial feedback on the joint work is positive.”

How does the research stay impact your future research?

“I have established a permanent working relationship with Profs Buckley and Arner. We have drawn up a joint research agenda comprising as of now four more papers to be finished in 2018. We further agreed on a book project on FinTech Law and Regulation, to be submitted in 2019.

“The insights gained during my stay in Sydney will further the research quality of University of Luxembourg’s interdisciplinary FinTech working group, one of the University’s strategic commitments. It has increased my international network and regulatory expertise, which adds to Luxembourg’s reputation as a FinTech centre.

“And, although such rankings do only matter as indicator of interest by peers, our joint publications have pushed my personal download figures on the research platform SSRN into the top 30 of the world’s legal scholars (measured by downloads in the last twelve months). This in turn has raised significant awareness for Luxembourg as center for FinTech research and leads to a much improved position when hiring new research staff, speaking at and organizing conferences or discussing with regulators across the world.”

What are the benefits of INTER Mobility?

“Through this link, the University of Luxembourg gained access to FinTech-related knowledge assembled in Sydney as one of the vibrant FinTech centres in the world, which is not accessible through simply reading publications. The visit to UNSW was crucial for the production of world-class research on such a fast moving topic. Without the FNR’s generous financial support, entering into an intense research cooperation with word-leading scholars is impossible.”

This success story originates from the FNR 2017 Annual Report – view the Annual Report as PDF or interactive digital version