Border Problems in Fintech Regulation: the ‘Border’ between the ‘Real World’ and ‘Cyberspace’

Since the 1990s, the Internet has become the communications channel by which an increasing number of commercial and financial transactions take place. But already in the 1990s, it was clear that the Internet was much ‘richer’ than just any communications channel. Various metaphors were employed to understand the nature of this new forum of human interaction. One of the most successful, and useful, of these metaphors likens the Internet to a place - the metaphor of ‘cyberspace’. This posits the Internet as a situs of economically and legally relevant objects, events, and actions, one that exists in parallel to and in some ontologically relevant sense apart from the physical location of the (human) parties interacting.

In our recent working paper, ‘Law and Borders II: Mapping the Third Border’, we explore the problems that Internet-based financial products and services raise for financial regulation. This conceptual piece builds on a 2010 paper by C.A.E Goodhard and R.M. Lastra, which explored the ‘border problems’ between regulated and unregulated activities and entities and between national jurisdictions in the wake of the 2008 Global Financial Crisis. First, we flesh out what is meant by ‘regulated’ and ‘unregulated’ in reference to both activities and entities. This reduces, at base, to a proposition of deontic logic - to say that something is ‘regulated’ is to say that it is not permitted unconditionally, i.e. that it is prohibited in certain circumstances. Most frequently, when we say that an activity is regulated we mean that it is subject to a general prohibition in the absence of a positive permission, for instance a license. (Sometimes we also mean that something is generally permitted but subject to oversight; we would suggest a distinction between ‘regulation’ and ‘supervision’ in this context). Second, we explore the nature of ‘territorial jurisdiction’, and how it relates to the first border. This sets the groundwork for a more technical, conceptual investigation of a ‘border’ between cyberspace and the ‘real world’.

In this context, we make a number of observations that we think are important to frame any examination of Internet-based financial services. First, we observe that the notion of a regulated activity also implies that the activity in question is possible in the first place. Technology  - in this case, information and communications technology -  makes new forms of interaction possible, which the law must then characterise as permitted, obligatory, or prohibited (and under what conditions). Secondly, we observe that the ‘real world’ - one seminal study of law in cyberspace from the 1990s refers to it as the ‘world of atoms’ - is not a very helpful way of describing conventional social, economic, and legal reality. Much of our social world is invisible and intangible. For instance, we can’t paint a right blue and a corporation is only a ‘body’ by dint of legal fiction. If we understand the role of documentation in the construction of this social reality, then we are better placed to understand the effects of digital, Internet-based documentation. Much of our social world is already made up of digital information repositories - the real novelty today is due to innovations like cloud-based computing and distributed ledger technology.

This leads us into a more general exploration of Internet jurisdiction, which we identify as a topic of debate that is going to increase in intensity over the coming decade, at least. Surveying the different approaches observable today, ranging from ‘Californian techno-libertarianism’ to ‘Chinese digital authoritarianism’, we echo recent calls for a European ‘third way’, which places emphasis on the importance of national sovereignty in cyberspace. It also accords private and hybrid stakeholders a role in the governance of this new ‘realm’ and recognises legitimate individual interests such as privacy.

While we do not present a mature theory of Internet jurisdiction, we note that a pure conflicts / private international law analysis is insufficient on its own. We refer to recent accounts that expound public and international public law interests that should also inform the emerging doctrine. In particular, we argue that conventional sovereigns must retain a role in the regulation of Internet-based financial services based on their consumer protection and financial stability mandates. We conclude with the hope that our exploration of the ontology of cyberspace is helpful to framing the broader debate. We also make a number of concrete observations in the context of financial regulation specifically.

Jason Grant Allen is the Humboldtian Post-Doctoral Fellow at the Centre for British Studies, Humboldt Univeristät zu Berlin and a Visiting Fellow at the Centre for Law Markets and Regulation, University of New South Wales.

Rosa María Lastra is the Sir John Lubbock Professor of Banking Law at the Centre for Commercial Law Studies (CCLS), Queen Mary University of London.