This chapter examines how the digital financial infrastructure that emerged in the wake of the 2008 GFC assisted to address the financial, economic, and health challenges presented by the COVID-19 pandemic. While the 2008 Crisis was a financial crisis that impacted the real economy, COVID-19 was a health and geopolitical crisis that impacted the real economy. In fact, during COVID-19 the financial system turned from problem child to crisis manager, having provided effective tools to support the crisis response. Notwithstanding the former, digital finance has also created new forms of risk (TechRisk).

This chapter analyses the drivers of the digital financial transformation. We argue that the digital transformation of finance has been driven by the quests for (i) efficiency, (ii) financial inclusion, and (iii) sustainability. These three factors are necessarily intertwined: financial inclusion underpins long-term oriented economies, and sustainable yet inefficient and unprofitable services are doomed to fail.

This chapter explores regulatory sandboxes and innovation hubs as the two main regulatory tools to support the digital transformation of finance. We argue that innovation hubs provide most of the benefits that the policy discussion associates with regulatory sandboxes, while avoiding most of the downsides of the former.

FinTech, as we lay out in this book, is best understood as including four major elements: first, global wholesale markets where digitisation means speed, crucial for capitalising on information advantages; second, an explosion of financial technology (FinTech) start-ups particularly since 2008 in the aftermath of the Global Financial Crisis (GFC) seeking regulatory lenience that was available to the small but not the large; third, the unprecedented digital financial transformation in retail finance in some countries, particularly China, India, and Kenya; and fourth, the increasing role of large technology companies moving into financial services and digital financial platforms.This long-term process of digitisation and datafication of finance has increasingly combined with the technologies commonly termed ‘ABCD’: Artificial Intelligence (A), Big Data (B), Cloud Computing (C), and Distributed Ledger Technology (D). The latter typically uses blockchains and makes possible the smart contracts that underpin cryptocurrencies and central bank digital currencies. These technologies have together, on the one hand, prompted the need for digital identification and, on the other hand, triggered the extraordinary growth we have seen: Regulatory Technologies (RegTech) and Supervisory Technologies (SupTech).We include all of these aspects of the revolution through which we are all living in the rubric, FinTech. Its ambit is broad and extends from innovations with disruptive effects on existing intermediaries, such as crowdfunding and crowdlending among many others, through to the entry into financial services of the BigTechs and the existential threats they pose to traditional banks.

This chapter develops a framework for understanding and addressing the increasing role of artificial intelligence (‘AI’) in finance. It focuses on human responsibility as central to addressing the AI ‘black box’ problem — that is, the risk of undesirable results that are unrecognised or unanticipated due to people’s difficulties in understanding the internal workings of an AI or as a result of the AI’s independent operation outside human supervision or involvement.

This chapter analyses the evolution of finance and technology. In the modern era, we mark this in four major periods. The first focused on electrification and lasted for a century until the mid-to-late 1960s. It was dominated by analogue processes and traditional banks. The second period of digitisation was marked by digitisation, including across securities markets (NASDAQ), payments (ATMs, SWIFT), mass computerisation (financial calculators, PCs), communications (Internet, mobile), and lasted 40 years. From around 2007–2008 onwards, a new trend emerged as a result of the application of a range of new technologies to finance, combined with the impact of the 2008 GFC on finance and regulation. These three driving forces– the 2008 Crisis, the application of a range of new and transformative technologies to finance, and a massive increase in regulation globally in response to 2008 and a range of financial scandals– underpinned the emergence of FinTech, short for ‘financial technology’. This third period lasted just over 10 years and saw the rise of data, and its algorithmic analysis in a process called datafication which has transformed finance. The most recent era, driven by the COVID pandemic, commenced in 2020 and is characterised by the emergence of scale, in the form of large digital platforms.

The fourth letter in the acronym ABCD stands for Data. Against the background of the Big Data Age this chapter discusses the relationship between data and financial regulation in four major jurisdictions: US, EU, China and India. We argue that data regulation is a crucial cornerstone that influences how FinTech infrastructure can be designed, built and operated, and thus influences the emergence of FinTech ecosystems. For FinTech, data regulation is a new form of financial regulation.

Since the 2008 GFC, financial regulation has increased dramatically in scope and scale. Post-crisis regulation, plus rapid technological change, has spurred the development of FinTech and RegTech firms and data-driven financial service providers. Financial regulators increasingly seek to balance the traditional objectives of financial stability and consumer protection with promoting growth, innovation, and sustainability. This chapter analyses possible new regulatory approaches, ranging from doing nothing (which spans being permissive to highly restrictive, depending on context), cautious permissiveness (on a case-by-case basis, or through special charters), structured experimentalism (e.g., sandboxes or piloting), and development of specific new regulatory frameworks. We argue for a new balanced, risk-based, proportionate approach that incorporates these rebalanced objectives, and which we term ‘smart regulation’.

This chapter summarises the lessons from Parts I to IV and concludes. First, we revisit the major drivers of FinTech: finance, technology, and regulation. Second, we examine how each of these drivers brings its own challenges, which one or two of the other domains have the potential to mitigate. Third, we show how the global discussion on how to regulate FinTech is indicative of a broader regulatory trend to expect more from the financial system than the mere efficient distribution of capital; and we argue how financial regulation which promotes resilience, financial inclusion, and expansion of financial resources is well equipped to further the overarching objective of sustainable development. Fourth, we analyse further how FinTech (and FinTech-oriented financial regulation) may be used to advance sustainable development. Fifth, we analyse the constituent building blocks of a comprehensive FinTech strategy.

RegTech is the use of technology, particularly information technology, in monitoring, compliance and regulatory reporting by industry, and in supervision and enforcement by regulators. For industry, regulators and policymakers, the pace of transformation in digital financial products and systems requires ever greater use of RegTech. In this sense, FinTech demands RegTech. While the principal regulatory objectives of financial stability, prudential safety, consumer protection, and promoting competition remain, their attainment increasingly requires the deployment of sophisticated technology by both reporting entities and regulators. The increasing use of RegTech prompts a paradigm shift necessitating the reconceptualisation of financial regulation.

Since the 1960s, finance has undergone a long process of digital transformation and is today probably the most globalised segment of the world’s economy and among the most digitised and datafied. This process is evident across four major axes: the emergence of global wholesale markets, an explosion of financial technology (FinTech) start-ups since 2008, an unprecedented digital financial transformation in developing countries (particularly China), and the increasing role of large technology companies (BigTechs) in financial services. This process of digital financial transformation brings structural changes with both benefits and risks. This chapter considers new risks, particularly new systemic risks which have emerged, focusing on cybersecurity and data.

This chapter analyses the meaning, legal implications, and policy consequences of Decentralised Finance (‘DeFi’). Decentralisation has the potential to undermine traditional forms of accountability and erode the effectiveness of traditional financial regulation and enforcement. At the same time, where parts of financial services are decentralised, there will be a reconcentration in a different (but possibly less regulated, less visible, and less transparent) part of the financial services chain. DeFi regulation could and should focus on this reconcentrated portion to ensure effective oversight and risk control. In fact, DeFi requires regulation in order to achieve its core objective of decentralisation. Furthermore, DeFi may further the idea of ‘embedded regulation’– building regulatory approaches into the design of decentralised infrastructure, potentially decentralising both finance and its regulation in the ultimate expression of RegTech.

Cryptocurrencies are reshaping money and payment systems in unprecedented ways. Catalysts include the launch of Bitcoin in 2009, the evolution of decentralised and centralised technologies, the announcement of Libra in 2019, the ongoing live trials of China’s Digital Yuan, and the COVID-19 pandemic and the related move to presenceless payments.This chapter considers the policy issues and choices associated with cryptocurrencies, stablecoins, and central bank digital currencies (‘CBDCs’) and emphasises that there is no single model for CBDC design. The catalysts reshaping monetary and payment systems challenge regulators. While Bitcoin and its thousands of progenies could be ignored safely by regulators, Facebook’s proposal for Libra, a global stablecoin (‘GSC’), brought an immediate and potent response from regulators globally. This proposal by the private sector to move into the traditional preserve of sovereigns– the creation of currency– was always likely both to trigger such a regulatory response and the development of CBDCs by central banks. China has moved first with its e-CNY– an initiative that may, in time, provoke a chain of CBDC issuance around the globe.