Fintech, Regtech, Insurtech & Legtech - An Introductory Guide for Lawyers

This short article on a very complex subject - the rapid and disrupting emergence of digital technology ("tech") - is designed to help busy practitioners get to grips very quickly with some dominant tech trends and their impact and how they can be taken advantage of.

"The art of life is a constant readjustment to our surroundings" - Kkuzo Okakaura

Why you should understand the "Techs"

NFT - Did you know that the most expensive NFT sale up to now is Beeple’s Everydays: The First 5000 Days which sold for $69.3 million at Christie's in March 2021? Do you even know what an "NFT" is and that in 2022 the NFT market it is currently worth more than $20 billion?

Sandboxing - If you are a law firm owner, do you know how "sandboxing" could make your life easier in compliance terms? In today's tough compliance regimes that are hard on the resources of businesses operating in fast-moving B2C fields, such as legal and financial services, understanding and using sandboxing protocols can cut your costs and significantly improve your deliverables efficiency.

Blockchain - Did you know that blockchain technology can dramatically tighten up your corporate security systems and improve your client and supplier management protocols?

If the above points resonate, do read on. This is a short piece on a very complex subject - digital tech emergence - but one which should help you get to grips very quickly with some dominant tech trends, how they affect you and how you may be able to take advantage of them.

Enter the Techs

The year 2022 saw trends in tech innovation moving at mind-numbing speed of innovation which seem to be for our own good and efficiency. These trends are changing the way we manage our money, pay for services or deliver them.

Particularly driven by the onset of the 2008 Financial Crash (“GFC”), the current worldwide health crisis, and the increasing prevalence of environmental disasters, the legal and financial services sectors are well into a technological evolution that is firmly digitally based which is driving fast changes in those industries worldwide.

Trends like Legtech, Fintech, Regtech (including Regtech “sandboxing”) and Insurtech encompassing blockchain applications such as NFTs and cryptocurrency, have emerged almost overnight. As a result, professionals in the financial and legal services fields need not only to be aware of them, but to keep up with them and become adept at working within them or face being left behind which, in the words of Winston Churchill could be “A fate too ghastly to contemplate”.

This article is intended to give a short summary of the prevailing “Tech” trends for uninitiated professionals so as to assist them in understanding them for their future professional growth and efficiency.

FINTECH

Financial technology, or FinTech, is about the use of technology, especially digital technology, to create and deliver financial solutions. For example, you utilise FinTech when you use an application ("App") on your mobile phone to access your bank account and to make payments from it. You are also using it when you use cryptocurrency to make a payment or call your bank and interact with an AI device ("Bot") to enable the bank to pre-screen your enquiry so that (hopefully) it may be dealt with quicker and more efficiently.

Digital technology in financial services is not new. It appears to have emerged in the late 1960s /early 1970’s which saw fast developments in many types of electronic payment systems and automated money clearing services, e.g., the Inter-Bank Computer Bureau in the United Kingdom and US Clearing House Interbank Payments System. Others like Fedwire and SWIFT (the Society of Worldwide Interbank Financial Telecommunications) followed shortly afterwards.

Blockchain & Fintech

Blockchain technology underpins modern Fintech developments and needs to be understood to get to grips with them. Back in 1982, a cryptographer, David Chaum, in a dissertation entitled "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups", presented a system for securing transactions outside a central authority. Others like, Stuart Haber, W. Scott Stornetta and Dave Bayer followed on with this research and thereafter the technology developed rapidly.

The first discrete “decentralized” blockchain appears to have been brought into existence by a one (or more) Satoshi Nakamoto in 2008. It became the core technology for the Bitcoin cryptocurrency which was the first digital currency to be regarded as reliable without the need for a trusted central authority verifying its transactions.

A Simple Guide for Understanding Blockchain Technology

The blockchain system enables transactions to be verified without there having to be a central authority involved.

To put this simply, let’s use banking as an example.

1. Traditionally, when you open an account with a bank, pay money into it, borrow from the bank, or pay money out of your account, a single authority would need to record and approve each event and your entire account details would be held in a central database. As central databases are open to being easily compromised by fraudsters, a centralized transaction verification system presents serious security issues.

2. On the other hand, as a blockchain system would verify each of the events mentioned above via several independent people and only when each of them agrees the event is deemed to be valid within their group, its security is far higher.

Blockchain System Components You Need to Know About

Here are the blockchain system components you need to know about to fully understand the technology: -

Nodes: A node is a “peer-to-peer”, non-centralized computer network that verifies blockchain transactions. Blockchain data is stored in a decentralized ledger which means that there are multiple sources of the stored data. The node is each place that the data is stored. The nodes talk to each other mainly cryptographically and share data within their network in the form of “blocks”.

Distributed ledger: A distributed/ blockchain ledger is a database that is shared and harmonized over many locations, or groups. Because the ledger that officially records an event, or product is decentralized, its security tends to be very high.

Peer to Peer (“P2P) network: A P2P network is grouping of nodes, or computer systems that communicate outside a central system, or administration. What this means is that each separate system in the non-centralized network has equal power and can do the same tasks. Again, as blockchain data is not stored in a central place, its security is higher than many others.

Blockchain architecture: This refers to the organisation for the storing, creation and management of blockchain data.

Private blockchain: A private blockchain is where a single organization has authority over the blockchain network. It is not fully decentralized, but as it has high security, many private organisations, where privacy is important, may find it a useful system to have in place for the protection of their data.

Consortium blockchain: A consortium blockchain is a grouping of several private blockchains.

Public blockchain: A public blockchain network is one where anyone can join and the information in it is open.

Cryptography: Cryptography is a secure communication system for encoding and protecting data. For example, it may be used for communications within nodes, to verify certain banking transactions, for e-commerce transactions and for creating computer passwords.

Private key: A private, or secret key is used to code and decode data within cryptography. They are in essence randomly generated codes that are difficult to guess. If you login to an application using “2-factor authentication”, a private key could be something similar to (but more complicated) like the code that is sent to you to verify your event.

Cryptographic hash: Cryptographic hash is an algorithm that maps or translate data of any size into any fixed size. For example, a digital signature could be “hashed”, and so could your email password stored in a site.

Block reward: (very nice thing, thank you very much!) You get a gift / block reward (in the form of a cryptocurrency issue) as a fee for each transaction you successfully approve /mine in a Bitcoin transaction as part of a node. They are also used in other applications. You are a “miner” if you are approving or verifying a cryptocurrency transaction.

Digital signature: This is the digital equivalent of a wet signature. As they are generated cryptographically, they are very difficult to forge and as such may be considered to be the essential components of blockchain transaction data.

Smart contract: Smart contracts use blockchain technology that verify them according to the blockchain's set conditions being met. So, a smart contract could start off with presented terms that include: a signature, payment, delivery of certain documents, or certain actions to be taken. The blockchain system would verify each of these events and authorize the contract accordingly at each stage.

Blockchain Technology in use

Today blockchain technology is used for virtual currency developments and transactions, securing contracts, supply chain management, security of data transfers, asset (or data) tracing, and asset management.

Fintech & Cryptocurrency

Of the "Tech" trends, FinTech has been the fastest to grow. For example, worldwide, increasing numbers of people are becoming aware of and are using digital currencies. Many have begun investing in digital currency and some countries like El Salvador and the Central African Republic, have adopted Bitcoin as legal tender. However, cryptocurrencies are not regulated.

A cryptocurrency, crypto-currency, or crypto is a Fintech-originated digital currency that is decentralized via discrete computer systems without there being the need for reliance on a central authority for maintenance, or the verification of its transactions.

As opposed to a central bank digital currency (CBDC) which is regulated and centralized, cryptocurrencies work through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database that depends on a very high degree of peer-to-peer authentication for each of its transactions.

Bitcoin

The first cryptocurrency was Bitcoin, which appeared in open-source mode in 2009. According to Bloomberg, by 2021, the cryptocurrency market was valued at $3 trillion and by July 2022, there were around 20,000 cryptocurrencies in circulation with many having a capitalization of well over $1 billion. There are approximately 300 million users worldwide and more that 18,000 businesses are accepting cryptocurrencies as a payment system.

Fintech and Non-Fungible Tokens (“NFTs”)

An NFT (Non-Fungible Token) is a digital currency which appears as a unit of digital data stored in a blockchain. NFTs can be sold, traded, and used as a digital asset. These days they represent a variety of physical, or digital objects and artifacts for example in art, music or gaming applications.

The NFT market developed very quickly in 2020–2021 and in 2022 it is worth more than $20 billion.

NFT appears to have fully launched as a digital currently when back in 2014, the digital artist Kevin McCoy minted the first-known NFT ‘Quantum’ on the Namecoin blockchain as a digital image of a pixelated octagon that changes colour and pulses like an octopus. It was sold in an auction by Sotheby’s for $1.47 million in June 2021. However, the most expensive NFT sale up to now is Beeple’s Everydays: The First 5000 Days which sold for $69.3 million.

After this and many experiments later by others in the field, there were other NFTs created on the Bitcoin blockchain with the Ethereum (digital currency) blockchain assuming a dominant role in that market later on.

The blockchained NFT has a unique digital identifier that cannot be copied, substituted, or subdivided. The NFT’s ownership is recorded in the blockchain and can be freely sold or traded by the owner.

Anyone can create an NFTs as their creation do not require much programming skills. As NFTs are unique assets, they are “non-fungible” as opposed to cryptocurrencies, which are fungible. Despite NFTs taking the market by surprise, it seems that they are now becoming a permanent feature in the future of the art.

Fintech and CBDCs

A Central Bank Digital Currency (“CBDC”) is essentially electronic cash which, like fiat currencies, gives holders the option for a direct claim on the central bank and allows businesses and individuals to make electronic payments and transfers.

Over 100 central banks including those in China, Russia, Australia, Eastern Caribbean, EU, India, Nigeria, Ukraine, UK, Canada and the USA have either rolled out CBDCs, or are actively evaluating their implementation.

Typically, a CBDC would allow users (even one without a bank account) via a smartphone, to use a downloaded app to make transactions. Those without bank accounts could go to approved non-banking financial institutions, or agents who would be able to verify a person’s information and then approve a CBDC account, or “wallet”.

China and CBDCs

In 2020, China became the first major economy to pilot and roll out a CBDC. China’s digital renminbi (“e-CNY”, is reported to have about a hundred million individual users and is currently trading billions of yuan in transactions. Unlike deregulated cryptocurrencies, CBDCs are regulated and centralized and pegged to a country’s currency and as such are considered to be relatively more stable and secure.

How Fintech is regarded by consumers

FinTech products have changed many different parts of financial services use and delivery from savings, personal finance, investment and wealth management to loans, mortgages, financial transactions and insurance.

Although FinTech provides many benefits to consumers, there are some concerns regarding consumer protection and data privacy. For example, the Social Credit System implemented in China as a national credit rating and blacklisting system has been a cause of great concern by many.

The social credit system records and rates the transactions of businesses, individuals and government institutions against a number of social factors including trustworthiness, social and financial behaviour etc. Basically, it is an Experian-type system on steroids which aims to improve trust in society as well as to encourage good financial and social behaviour by businesses and individuals. The systems decisions are taken by AI which creates a national rating for the subject.

REGTECH

The term Regtech (as coined by the UK’s Financial Conduct Authority (“FCA” – regulatory body) refers to the technological management of the monitoring, reporting, and compliance systems that exist within the financial services industry. It is a sub-set of Fintech.

As regulatory compliance is one of the most time- and resource-consuming activities for institutions, especially financial services ones, Regtech provides significant advantages in terms of management cost optimization and ease and accurate reporting of information to supervisory bodies.

Regtech systems include machine learning, artificial intelligence, and cloud-based processes and as there are more 400 regulatory changes every day in regulated industries and more than $240 billion in worldwide in fines for non-compliance, these systems are increasingly being put to good use by regulated bodies.

For regulators, macroprudential policy as part of Regtech has become part of the evolutionary utility of Regtech. That is because as the policy is designed to mitigate the severity of financial cycle events though the analysis of data reports for the identification of “heat maps”, Regtech serves to enable them to anticipate and/ or prevent worldwide financial crashes in the future.

Sandboxes

As compliance rules are being issued on a constant pace to cater for developments, especially in the financial services sector, the UK’s FCA has taken the lead in the development of a robust and structured framework for the efficient testing of innovative financial products and services called “Sandboxes” which are primarily driven by Regtech.

A sandbox is a regulatory reporting or compliance system that has been approved by a regulator for a limited time so that regulates' innovations may be tested in real life environments before being officially regulated.

For example, in Germany, Section 7(2) of the Carriage of Passengers Act allows for sandboxing as follows: “In order to allow for the practical testing of new modes or means of transport, the licensing authority may, upon request on a case-by-case basis, authorize exemptions from the provisions of this Act or from provisions adopted on the basis of this Act for a maximum period of four years, insofar as they do not conflict with public transport interests”.

Similar sandboxing regimes exist in the country for innovations in drone technology.

In the UK, for financial services institutions, the FCA’s website sets out how they can be applied for and the general criteria for granting them.

In other jurisdictions, such as Belgium, the Philippines and South Africa sandboxing is well-established and where sandboxing is not catered for, regulators have been supportive of them by allowing some flexibility in the applicable regulations to cater for innovations.

INSURTECH

Insurtech generally refers to the technological innovations that are intended to improve the efficiency and operations of the insurance industry.

Insurtech, like Regtech is a subset of Fintech. The technology has enabled users to access their insurance requirements from smart devices like mobile phones. Today, mobile phone applications enable people to get insurance almost immediately to cater for their sudden travel and car insurance needs for example.

Insurtech developments have assisted insurance companies in their underwriting and processing of claims and to manage their assets.

In particular, Insurtech’s utilization of blockchain technology has enabled the industry to improve data security and standards which have resulted in higher trust between the parties concerned, the lowering of transaction costs and speedier transactions.

Utilizing data analytics driven by technical interfaces, insurance companies can also anticipate their customers’ needs for the development of new products and services.

LEGTECH

In recent times and the advent of remote working brought about at the height of the ongoing worldwide health event, the legal service industry has innovated and adapted by its adopting new technology.

LegTech solutions are dramatically changing traditional legal practice and in 2018, it is reported that the technology generated over $1 billion of investment which represented a growth of some 700%. As such Legtech may be considered to be potentially one of the most promising sectors for investment of the “Techs”.

The technology uses Artificial intelligence (AI), machine learning, blockchain (for smart contracts) as well as natural language processing systems. The technology can never replace the function of legal practitioners. However, it is dramatically changing the way that legal services are delivered. The technology is essentially aimed at legal services delivery easier and has made judicial functions more easily available and accessible.

Typical Legtech Uses

Legtech is typically used in the following scenarios:-

Data Analytics – these systems provide for the faster access to legal authorities and documents.

Compliance – the systems cover risk management and automated compliance management.

Document Management – the systems developed are for documents creation and management systems.

Professional Legal Education – these cover systems for the provision of legal education via new technology.

Legal research – the systems give technologically-based assistance for the sourcing and analysis of the information to support legal decisions.

Apps – these are applications for allowing users to access and deliver legal services online via various media.

Litigation & Dispute Resolution - these systems apply to online court hearings and dispute resolution events in the ADR field and also for the resolution of legal claims and regulatory matters.

Legal Practice Management – these systems apply to the management of legal operations. For example, Legtech portals such as Fiverr and LegalMart now enables sole practitioners from anywhere in the world to offer their services online and internationally. As such, the systems represent great savings in operational and marketing costs for sole practitioners and emerging firms.

E-discovery - this refers to systems for locating, accessing and identifying digital evidence for court proceedings.

Remote Data Storage - systems for allowing legal information to exist in the “cloud” – via remote proprietary, or non-proprietary servers. Cloud computing offers the facility for users to remotely connect to their information via any mobile device irrespective of their location. With the advent of home, or remote working brought about by the current worldwide health crisis, systems that enable remote-working appear to be vital for the survival of any firm. These days, more than 80% of legal departments and firms have migrated their data to the cloud.

Virtual Legal Assistants – LegalTech has created intelligent robots (“bots”) that provide support to lawyers in their daily tasks through automating certain functions. The technology enables lawyers and their supporting teams to increase their output by reducing their response times to mundane and frequently occurring events.

Digital Signature – digital signatures have spiked in popularity due to worldwide health events. As they have higher security in remote working scenarios, they serve to increase productivity and reduce operating costs that wet signatures entail.

Legtech is enabling smaller and new firms to have access to powerful research tools which gives them a level playing field for competing against their larger competitors. For example, Clarivate, a LegTech provider, sells a wide variety of tools for fast and efficient litigation management worldwide including those for monitoring a party’s behaviour in litigation over time.

A 2015 PWC report demonstrated that increasing and improving the use of technology was the top priority in 94% of law firms for the following year. Furthermore, as clients are increasingly demanding greater efficiency and more personalized customer service, it seems that firms that are unwilling or dilatory in meeting those needs, may well suffer economically in the future.

AI: CROSS-CUTTING TECHNOLOGY POWERING FINTECH, REGTECH, INSURTECH AND LEGTECH

Artificial Intelligence (AI) is increasingly connected to each of the "Techs," and drives improvements in data processing, automation, and predictive analytics. AI algorithms are utilized to power faster and more accurate data analysis so as to enhance customer experiences, regulatory compliance, and overall operational efficiency.

AI Fintech

In Fintech, AI commonly tends to be applied for fraud detection, credit scoring, and customer service through AI chatbots. In this field, AI machine learning models are used to analyze huge amounts of transaction data to work out anomalies in real time so as to reduce fraud and financial crime.

In addition, AI-powered personal finance management apps, like Cleo and Mint, are designed to support users in managing spending and investments.

AI Regtech

In Regtech, AI systems address and manage complex regulatory requirements by automating routine tasks such as monitoring and reporting. In that regard, Natural Language Processing (NLP) algorithms help compliance teams deal with and process regulatory documents, extract relevant insights, and automatically screen for regulatory changes. AI's predictive capabilities also provide for "heat mapping" in risk management so as to give businesses the option to be proactive in respect to regulatory compliance.

AI Insurtech

In Insurtech, AI serves to streamline underwriting, claims processing, as well as customer service. For example, some insurers use machine learning to work out risk more accurately and to determine price policies in real time. In regard to data analytics, Insurtech apps like Lemonade are able to process claims within minutes and by so doing, enhance customer satisfaction and reduce administrative costs.

AI Legtech

For Legtech, AI applications are used to assist users with document analysis, contract review, and legal research. AI tools like Kira Systems and Lex Machina, which are AI-driven, can be used to analyze legal documents to identify key clauses. AI also supports virtual legal assistants, enabling them to manage routine inquiries, leaving lawyers free to deal with more complex matters.

AI’s impact across the Techs

AIs uniquely intersects with each "Tech" domain and its emergence has significantly transforming financial and legal landscapes. As such, law and finance professionals are becoming increasingly reliant on AI tools for enhanced efficiency and responsiveness across all fields. All this serves to make AI an indispensable part of the evolving Tech.

DISCLAIMER

This article has used materials from a number of publicly available sources. If any such source has not been so acknowledged, this has been incidental and not deliberate, and it is hoped that this will be forgiven due to the non-commercial and public educational aspect of the article. The article is not legal or professional advice and must not be regarded as such. Before relying on any information in it, readers should consult suitably qualified professionals.

ABOUT THE AUTHOR: Dr Andre Alexander
Dr Andre Alexander is a barrister and solicitor and partner in ABS&P International Law Firm.

Copyright ABS&P International Law Firm

Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. It is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws and.how they may affect a case. For specific technical or legal advice on the information provided and related topics, please contact the author.