'Cryptocurrencies in the Common Law of Property' by David Fox
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The development of cryptocurrency technology has been driven by a desire to create autonomous systems for carrying out digital transactions. The people who use them may neither seek nor want extraneous legal intervention. Property law is as much a kind of state intervention as all the more familiar rules of financial or securities regulation that have attracted so much attention from legal commentators. Property law is default law. If a certain resource can be characterized as an object of property, then the rules of property law apply to it as far as the nature of the resource allows. The view advanced here is that many features of a common law system of property would apply to cryptocurrencies. Once the data comprising crypto-coins are understood for what they are, they should be a suitable object of property. The old binary conception of personal property consisting in chooses in possession and chooses in action should not be an obstacle, if indeed it ever was, to their recognition as property. With some necessary adaptation to allow for the intangibility of crypto-coins, the usual rules of derivative transfer of title and tracing could apply to them. Granted, the common law has no ready-made rules especially designed for cryptocurrencies. But that very absence of rules may be as much an adaptive strength as a systemic failing. The common law grows by a process of principled analogy between the old and the new. The common law provides a reserve of general principle that can provide a default set of property rules for cryptocurrencies without the need for targeted statutory intervention.
The 141 page Australian Centre for Financial Studies
report by Deborah Cope, Yvette Bauder and Lee Cope on
International competition policy and regulation of financial services comments
Like many countries, Australia is examining the role of fintech in its financial services sector.
Governments and regulators are considering whether consumers and businesses using
financial services would benefit if policy and regulation were changed to recognise the specific
characteristics and circumstances of fintech businesses. There are, however, no
comprehensive data or analyses of the costs and benefits of such policies. Some information
is emerging, but it is still limited.
This paper looks at what international evidence is available and draws on various countries’
experiences with financial services reforms to provide data that could inform Australian policy
discussions.
Internationally, the demand for fintech services is strong and growing. It is no longer just techsavvy
early adopters using these services; they are becoming more mainstream (EY 2017,
p.7, 20). Many fintech business and commentators argue, however, that there are constraints
on fintech’s ability to compete with traditional financial services and, as a result, consumers
and businesses are not fully benefiting from the improvements in quality, price and new
products that added competition could bring. They also argue that governments and regulators
should change their policies and approaches to regulation to facilitate competition.
Care is needed, however, when governments consider intervening in markets, even when the
objective is to improve competition. To improve welfare, the benefits need to result in overall
improvements in efficiency and economic growth, rather than benefitting one business, sector
or industry at the expense of others. Regulators still need to be able to maintain acceptable
standards of financial stability, and consumer and investor protection. Additionally,
intervention can be costly, and those costs may be greater than the benefits of government
action.
While, as noted above, there data on the overall benefits and costs of overseas fintech policies
are limited, international experience can still help inform Australian policy. It can help to identify
areas where reform could be considered in Australia, because there are potential barriers to
competition, and evidence of potential benefits from reform. Further analysis of the costs and
benefits of specific proposals is needed, however, before concluding that such reforms would
definitely benefit the Australian economy.
International experience
FinTech growth appears to happen under three types of country conditions. The first are
conditions such as in the US, which has a history and culture of promoting startup businesses,
and established processes for supporting new business investment. It has the world’s highest
investment in fintech, built on a strong venture capital sector. In other countries such as China,
fintech has grown because businesses have been able to operate in regulatory gaps, outside
the existing rules. However, this has resulted in problems when poor practices have emerged.
Some such countries are now introducing new rules to regulate these providers. The third
group of countries, including the UK and Singapore, are adopting policies and regulation that
recognise the specific characteristics of fintech businesses and using a sophisticated
approach to fintech policy and regulation to increase competition in financial services.
Regulation affects market entry
There are regulatory and market barriers to businesses entering the financial services market.
Since the global financial crisis, the cost and complexity of regulation have increased, and
there is considerable evidence that the presence or absence of financial services regulations,
and the form of those regulations, affects the cost of starting a fintech business and those
businesses’ ability to compete (Deloitte 2017a, p.39).
Individual fintech businesses report that regulation creates barriers to innovation, making it
harder for them to enter the financial services market and compete with traditional providers.
Where there are gaps in financial services regulation, there is often market entry, growth and
innovation in fintech, indicating that the absence of regulation enables innovation. Finally,
sector experts consistently report that investment grows when governments initiate changes
to open up markets.
Barriers to innovation and market entry often reduce competition. There may be benefits,
therefore, to reforms that remove such barriers without undermining the objectives of the
regulation.
Competition and consumer benefits
There is evidence that growth in fintech services results in new products and services that
benefit consumers and stimulate competition. Such competition can put considerable pressure
on established financial institutions, which creates incentives to reduce bank fees and interest
rates. It can also increase access to financial services, and the range of services and service
providers available to customers (section 2.2).
International competition policy and regulation of financial services
In areas such as small business lending, where the cost of finance is high and increasing,
there are also potential benefits to having access to a broader range of financial services
(ASBFEO 2017, p.2). FinTech can play a role in this area, as 16 per cent of investment in
fintechs has been in business lending (World Economic Forum 2015, p.10). Businesses using
these services believe they are essential; 33 per cent believe they would be unlikely to get funds elsewhere (Nesta 2014, p.10).
Many of the initiatives that make markets conducive to fintech growth have broader
competition benefits. Such policies allow fintech products and services into the market, but
also encourage more competition among traditional financial services providers. There are
extensive benefits to greater competition in broader financial services. The Digital Single
Market Strategy, for example, is expected to add €415m to the EU economy (EC 2017c). The
UK Competition and Markets Authority also conservatively estimated the direct benefits alone
of its recommendations to improve competition in banking were £150m to £250m a year,
accumulating to £700m to £1bn over five years (CMS 2016, p.xivii).
These gains do not rely specifically on fintech growth. There is, therefore, a strong case for
considering broad competition reforms in financial services that enable competition from
fintech, but also facilitate competition across all financial services providers without
compromising market stability or customer protection. Such policies can be valuable, even if
the expected growth in fintech does not eventuate.
International priority reform areas
International commentary on fintech policy and consultation in preparing this report highlighted
four areas of government policy and regulation that are seen as potentially significant:
1. A pro-competitive approach to financial services
2. Open, transparent regulators that engage with fintech businesses
3. Removing specific entry barriers
4. Enabling connectivity.
A pro-competitive approach to financial services
Financial services regulators commonly have objectives to maintain the integrity and stability
of the financial system, including monitoring and managing business and financial risks, and
protecting consumers’ and investors’ interests. Some are also required to deliver these
objectives in a way that explicitly recognises the benefits of competition. The UK is the most prominent example where financial regulators have an explicit objective
to promote competition in financial services markets. The UK Financial Conduct Authority’s
competition mandate gives rise to a range of activities, including making new rules, issuing
guidance, conducting market studies and undertaking investigations and enforcement. The
Bank of England Prudential Regulatory Authority also has a competition objective, which it is
required to pursue as far as possible without compromising its primary objectives. Regulators
in some other countries are also required to consider competition, innovation and market entry
when they make regulatory decisions (section 3.1).
In Australia, the Australian Prudential Regulation Authority is required to consider competition
and contestability in its decisions, and the Australian Government recently announced that the
Australian Securities and Investments Commission (ASIC) has been given a competition
mandate.
Based on the UK experience, it appears that an explicit competition mandate with
accompanying powers affects the type of work the regulator does, the issues it considers when
making decisions and the outcomes against which it is held to account. In practice, the UK
competition mandate has resulted in its regulators actively seeking to inform themselves and
others about competition issues, and responding more proactively when such issues come to
their attention. It makes it clear that the regulator’s decisions must take account of the effect
on competition, and that the regulator needs to be transparent about how this is done. Overall,
the regulator has a better understanding of competition issues and the authority to act if
competition concerns arise.
Open, transparent and engaged regulators
Regulation can create barriers to competition because of the nature of the rules, or the way
they are administered and enforced. FinTech businesses, advisors and investors value having
a clear point of contact with the regulator, an open regulator that will engage with business,
and clarity in their regulatory obligations. They also value clear and proportionate regulation
that supports consumer confidence and trust. Open processes that engage businesses can
help regulators to achieve their objectives without imposing costs or constraints on businesses
that stifle innovation and competition.
Regulatory uncertainty is, however, a continuing issue. Engaging with a regulator requires
considerable time and resources, and businesses’ willingness to devote these resources
shows the importance they place on such engagement. ASIC data indicate that early
engagement has tangible benefits. Businesses that sought informal advice, for example
through ASIC’s Innovation Hub, significantly reduced the time for their license approval (EY &
FinTech Australia 2017, p.34).
Two specific areas where industry has highlighted the need for strong engagement with
regulators (and many regulators have responded) are regulatory sandboxes and licensing of
new service providers More than 20 countries have, or are planning to, set up regulatory sandboxes. The UK
sandbox is the most well-established, with 18 businesses entering testing from the first cohort
and 31 businesses from the second cohort declared eligible. Interest in the sandbox is
growing, and, while it is early days, the Financial Conduct Authority has analysed the results
from the first year and concluded that the sandbox has been a success. Sandbox activities
benefitted consumers by reducing prices and improving service quality. Participants also
benefitted from reductions in the risk, time and cost of launching businesses to market,
obtaining full authorisation and attracting external funding. This further reduces barriers to
market entry.
In Australia, legislation is before Parliament to expand the scope of activities and the
timeframe for testing financial products and services in ASIC’s regulatory sandbox
(Attachment A).
Many fintech businesses can and do provide services that do not require a licence. But
licensing is emerging as an issue, as Governments extend the range of activities that require
authorisation and fintech businesses expand their activities in competition with traditional
financial services.
New bank entry is usually supported, to improve competition in financial services. There is
some evidence that challenger banks have had an impact on competition, particularly in areas
not well serviced by the traditional banking sector (section 3.2). There are, however, barriers
to new businesses obtaining a licence, and while standards are needed to maintain security
and trust in financial services markets, some countries are reviewing their licensing processes
and minimum capital requirements to ensure they do not create unnecessary barriers.
Removing specific entry barriers
Regulatory systems and financial infrastructure were designed with established financial
institutions in mind. They may therefore be costly to navigate or unsuitable for new fintech
services, or unable to accommodate the technological innovation customers expect. Many
countries are modernising their regulatory approaches in areas such as payments systems
and opening up banking systems to facilitate innovation and competition. The aim is to remove
barriers that unnecessarily restrict competition without undermining the objectives of the
regulation.
Payments systems reform is facilitating faster payments without compromising security. These
reforms are generally not directed specifically at fintech businesses, but they result in
considerable cost savings and, to the extent they enable more technologically-based payment
services, they provide an opportunity for fintech innovation and competition.
Countries are also looking to make their banking systems more open. There are currently
practical barriers that make it difficult for new entrants to integrate their products or services
with those that customers already use. However, the value added by many fintech services
relies on them working with other types of financial services. Attracting customers away from
incumbent providers is a significant challenge identified by fintech businesses, but it is
necessary to allow the collaboration and innovation that best serves the financial sector.
Policies to encourage more open banking fall into two broad categories: (1) giving customers
more rights to own and control their data and requiring businesses holding that data to provide
it to a third party at the customer’s request (data ownership and control); and (2) requiring
incumbent providers to modify and open their systems to make it possible for third parties to
connect and provide additional services at the customer’s request (open APIs).
Lack of access to data and bank systems is hindering innovation. Regulators, consumer
organisations and industry participants have all argued that open data policies would make it
easier for customers to search and switch accounts, improving competition and encouraging
innovation. While many open banking reforms are at an early stage, investment and interest
in new services is already growing, and significant benefits are predicted (section 3.3).
APIs are commonly used to generate innovation that disrupts traditional business models
across a range of sectors outside financial services. There are also existing examples in the
financial services sector, where open access has stimulated growth in services and
competition.
In some countries, some banks are becoming more open without government action.
However, it is unlikely that an industry-wide, consistent approach will emerge on its own. While
the benefits and efficiencies of an open system are recognised, there are significant first mover
disadvantages. Individual banks are reluctant to open their systems without similar action by
their competitors. There are also benefits in developing standards and approving service
providers centrally, to avoid inconsistency and duplication.
The Productivity Commission argued that data has tremendous value. It concluded that there
are enormous benefits if data is widely used and more generally available, but that there are
risks. Nevertheless, many of these risks can be managed with the right policies and processes
(PC 2017, p.8-9).
Enabling connectivity
Some aspects of fintech are considered disruptive, such as replacing existing services with
new services or methods of delivery. However, most of the growth opportunities require
collaboration, either across fintech businesses or between fintechs and more traditional
financial services providers. The need for collaboration is well recognised. Such collaboration
can emerge through many mechanisms, and there is international evidence of interest in
initiatives such as partnerships among businesses, participation in industry associations, and
involvement in incubators, accelerators, innovation labs, hackathons and similar programs.
The report argues that there are international lessons for Australia
In Australia, there is considerable opportunity for fintech growth, and the use and awareness
of fintech services is high (EY 2017, p.12-13). Given the size of the Australian market and the
newness of its fintech sector, Australia ranks relatively well internationally.
While, as noted above, there is evidence of benefits from increased competition and greater
access to services from growth in fintech, it is more difficult to establish the link between these
benefits and government policies. Government policy and regulatory changes will benefit
Australia when the broad benefits of those policies outweigh their costs. There are three main
categories of potential intervention:
1. Policies that remove regulatory barriers to entry (more open and transparent
regulation, industry sandboxes, licensing reforms and pro-competitive mandates)
2. Policies that remove market barriers to entry (opening up banking and payments
system modernisation)
3. Industry promotion and support (grants and businesses assistance).
Policies that remove regulatory barriers to entry
It is good regulatory practice to remove unnecessary barriers to market entry and competition,
so that policy focusses on managing the risk of harm and does not favour a particular business
model or technology.
This is an area where the benefits of reform often justify the costs, but such reforms are not
costless, particularly in markets with a long-established regulatory framework. Reforms are
likely to have community-wide benefits when they:
• Can be introduced without imposing excessive costs on businesses or taxpayers, and
any risks such as fraud, corruption, consumer detriment or market instability can be
managed
• Result in significant growth in new products and services, service improvements or
large cost reductions, or encourage existing financial services providers to improve
their efficiency.
Policies that remove market barriers to entry
In some markets, there are natural barriers that make it hard for new businesses to compete,
even with favourable policies and regulation. These can arise because of market
characteristics, or because the incumbents have a strong entrenched market position
(perhaps as a result of previous government regulation).
In industries such as telecommunications, electricity and transport, governments have
changed policies and regulation to facilitate competition. A lot of commentators argued that
pro-competitive reforms are necessary to realise the full potential of competition in financial
services. Changes that open up banking and facilitate access to data potentially have high
compliance and implementation costs, but if they stimulate improvements in efficiency and
innovation, and encourage cost reductions, they are also likely to deliver considerable
benefits.
Industry promotion and support
Industry support programs run the greatest risk that their costs outweigh the benefits. Unless
they are designed to address a clear market failure or achieve social policy objectives, they
may simply transfer activity from one sector of the economy to another, without stimulating
broader economic or social benefits.
Should Australian-based businesses be a priority?
Customers benefit from new products and services regardless of whether they are produced
by Australian or overseas businesses. Business growth also benefits the Australian economy,
as long as it is based on the competitiveness and efficiency of the businesses, rather than
policies or supports that favour one activity over another.
Policy should therefore be focussed on enabling competition wherever it comes from,
removing barriers to setting up businesses in Australia, and addressing market failure.
Australian consumers and business customers would then have access to the best possible
financial services. In addition, Australian businesses that succeeded in a competitive domestic
financial services market are likely to be well equipped to grow and compete overseas
