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Toward a New Regulatory Paradigm

Dirk A. Zetzsche (Universite du Luxembourg - Faculty of Law, Economics and Finance; Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC); European Banking Institute), William A. Birdthistle (Chicago-Kent College of Law - Illinois Institute of Technology), Douglas W. Arner (The University of Hong Kong - Faculty of Law) and Ross P. Buckley (University of New South Wales (UNSW) - Faculty of Law). Posted on SSRN on 3 March 2020 | Last revised on 16 December 2020

This paper has been featured in a recent blog written by the authors for the Global Financial Markets Center - Duke University School of Law's The FinReg Blog. The authors pointed that: "The neglect by scholars of financial operating systems may well not be (harmless). The $50 trillion asset management industry in the U.S. has far more funds under management than the banking system, and it depends almost entirely on Aladdin." Aladdin, the authors explained, is "the operating system upon which the entire industry depends", adding that it was similar to China's Ant Financial prior to 2021. The authors pointed: "Aladdin has been described as the oxygen necessary for the entire industry’s operation."

In this paper, the authors offer analyses to redress the problem.

Large U.S. financial and tech firms, including Facebook, Apple,  and Google, are working hard to emulate Ant’s scale and scope.  The end result we foresee is the market dominance of a small  number of digital finance platforms (DFPs).

Paper abstract: One of the most consequential yet unexamined developments in finance is the recent evolution of large financial technology platforms. In the first analysis of its kind, we scrutinize the world’s $89 trillion investment and asset management industry to explore the function of these systems, to consider their possible risks, and to develop a taxonomy for their regulation.

This analysis is essential because these systems now play a critical role in asset management, rendering nugatory several layers of existing regulation. While the COVID-19 pandemic has caused havoc with economic activity, it has accelerated this process of digitization and concentration of financial control. The leading example of such a platform is BlackRock’s Aladdin, a system used to manage the risks relating to ten percent of the world’s investment assets and which institutional investors – as well as the U.S. government – admit they cannot operate without. Even greater concentrations of financial power are possible when Big Technology firms and finance unite. Ant Group, a spinoff of Alibaba, controls a financial ecosystem for over 1.2 billion clients – twenty-one percent of the world’s adults – covering all financial services, including payments, insurance, asset management, and deposits. Large U.S. financial and tech firms, including Facebook, Apple, and Google, are working hard to emulate Ant’s scale and scope, driving concentration into a small number of dominant digital finance platforms. Although Financial Technology is typically associated with small innovative firms, we argue that these giant digital finance platforms are already having a far greater impact on society. We identify the economic reasons for the dramatic ascendancy of these financial leviathans and propose a legal framework for mitigating their threats to national security, financial stability, consumer protection, antitrust and cybersecurity.

Prof Douglas Arner and Prof Ross Buckley are instructors of HKU FinTech Professional Certificate in Fintech on edX. Part of the certificate is the world's largest fintech online course on edX: Introduction to Fintech.

Keywords: FinTech, RegTech, Operating Systems, Financial Regulation, Big Data, BigTech, TechFin, Enforcement, Asset Management, Robo-Advice, Collective Investment Schemes, Mutual Funds

RELATED VIDEO: Global Digital Finance Platform
Douglas Arner reflects on the evolution of financial technology, culminating in today's FinTech 4.0, characterized by the rise of digital finance platforms on the basis of Big Data, network effects, and economies of scope and scale. In this latest phase, big techs like Apple, Facebook, Ant Financial and Tencent are recreating and reshaping finance, economies and societies. In looking at the evolution of digital finance platforms, economies of scope and scale and network effects are leading inexorably to concentration and dominance. While network effects and economies of scope and scale in finance and technology are producing tremendous benefits across the world, particularly in the context of payments, communications, analytics and access to finance, they also bring risks: after all, in a "winner takes all" world, eventually everyone else loses. Looking forward, we need to consider both the benefits as well as the risks of digital finance platforms across policy and regulatory discussions.


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