China is becoming one of the world’s key countries for the development of financial technology, and lawyers are set to reap the benefits.

Fintech has quickly become one of the fastest-growing sectors in China, the country has also become the largest fintech market in the world.

According to an Accenture analysis report this year, global investment in fintech ventures more than doubled in 2018, reaching a whopping $55.3 billion. China is the main contributor to this significant growth - the value of deals in China increased nine-fold to $25.5 billion in 2018, accounting for 46 percent of all fintech investments that year.

Buzzwords such as “blockchain”, “cloud technology” and “big data” can be seen everywhere.

“Electronic payments, AI, cloud computing, big data and blockchain are being discussed regularly,” says Jack Ding, partner of Duan & Duan. “Companies from traditional industries have been exploring ways to apply blockchain technology into their daily operation. For example, in retail, such technology may be able to accelerate efficiently integration of supply chain, logistics and transaction.”

“The use of new technologies to upgrade or even disrupt the existing fintech products and services, deploying better cloud infrastructures and achieving more robust security system are all hot topics in fintech,” says Barbara Li, partner and head of Norton Rose Fulbright’s China Fintech and TMT practice.

“We expect that the fintech industry will deploy more emerging technologies such as artificial intelligence, blockchain, big data, cloud computing and Internet of Things, in developing new products and business models, providing wider coverage of financial services to SME businesses and building up a robust security system,” Li adds.

The rapid rise of fintech has also translated into a surge in the demand for legal services.

Legal and regulatory analysis is usually carried out before launching a business or a product. Merger and acquisition activities for fintech related assets are also becoming more active, as people have realised that this area holds great potential, says Kimi Liu, counsel in Clifford Chance’s banking and finance practice.

GOVERNMENT PLANS

And as the government continues to explore the regulatory paradigm of fintech, lawyers serve as navigators for companies in this fast-changing sector.

According to Ding, licensed financial service providers have been investing heavily in fintech with assistance from lawyers. However, start-ups and middle-sized companies are “less receptive of engaging attorneys to help guide their businesses” which have led to the arrest of founders of the companies due to violation of laws and regulations.

One of the many ongoing legal discussions surrounding fintech is the boundary of financial regulation, i.e., to what extent fintech activities will fall within the scope of financial regulatory oversight. “With the scandal of P2P lending, the PRC government will not tolerate any offering of financial services that is ‘packaged’ as new technology which operates outside the current regulatory framework,” says Liu.

In August, the People’s Bank of China (PBoC) released the Fintech Development Plan (2019—2021) to outline guidelines, basic principles, development targets, key tasks and supportive measures for the development of fintech in the next three years.

The three-year plan aims to improve the quality of financial services, strengthen regulation on technology-driven innovations, and curb financial risks. “The plan is the first holistic policy issued by PBoC on fintech. It provides a clear road map and top-down guidance on developing the fintech industry in China,” Li says.

She continues to explain that the newly released plan emphases on the importance of using emerging technologies such as AI, big data, cloud computing, virtual identification to empower the financial services. Fintech is encouraged to be used in achieving financial efficiency, risk control and effective regulation. “The Plan indicates the need for adopting the ‘sandbox’ approach to encourage innovations and allow flexibilities in promoting and rolling out new fintech products and services,” says Li.

She also notes that one aspect particularly worth noting is that the plan highlights the importance of cybersecurity and personal information protection in the financial sector. In order to achieve that, the Plan urges that security plans and cybersecurity contingency plans to be formulated and enacted, financial personal information shall be protected by way of building security rules, using accredited security products and technologies, and conducting regular auditing and security assessments.

“This balanced approach appears to resonate the PBoC’s consistent position that it is important to manage the risk while using emerging technologies to develop new fintech products and services,” says Li. “This will no doubt bring opportunities as well as challenges for lawyers.”

“I believe that PBoC is very open to learning from other countries and is trying to set up a more effective regime to tackle relevant issues domestically,” says Ding from Duan & Duan. “I am in favour of a stable and transparent legal framework governing the fintech industry. This may ensure the healthy and stable development of the industry.”

“As PBoC has pointed out in the plan, fintech is innovation of financial service that is driven by technology.

Therefore, the essence of fintech is still financial service, but with technology innovation, the presentation of fintech could be quite different from the traditional financial services, introducing new issues and risks to tackle,” says Liu.

Li notes that the PBoC has been reported to speed up the process of developing a digital currency, which echoes its three-year plan. Ding, on the other hand, is interested to see whether there would be any new regulations introduced to regulate other cryptocurrencies; and whether overseas trading platforms for digital assets could be legally and domestically operated in China.

“It is expected that PRC government will issue fundamental fintech regulation to set out the key parameters, but this seems to be a medium-term plan,” says Liu. “Therefore, striking a balance between regulation and development is still worth further consideration.”

In addition to the fintech development plan, Terry Yang, a partner in Clifford Chance’s banking and finance practice, raised an equally important issue: the evolution of regulations over data in China, particularly the treatment of cross-border data transfer.

“This is particularly relevant for international players seeking to access the PRC fintech market, where the increasingly extraterritorial reach of data security requirements in all jurisdictions is likely to require market participants to spend significant effort to ensure compliance,” says Yang.

“A legislative process has recently been announced to update China’s data protection framework,” he adds. “Many observers expect the current high-level rules to be worked out in a way that may resemble the European Union’s General Data Protection Regulation (GDPR) on key points, which would also have an important influence on the development of personal data-driven fintech innovation.”

CLIENT NEEDS

To meet the clients’ changing needs, law firms are adjusting their business strategies. For example, Duan & Duan has recently added criminal, family planning and arbitration attorneys.

Li says that with the continued growth momentum of the fintech industry, her firm has been approached by a number of financial institutions, data analytics companies, PE investors and technology disrupters who are entering into or expanding their foot-holds in the fintech market.

“Meanwhile, risk management is also a major concern for those clients to address issues in designing and developing new fintech products and services,” she reveals. “We have assisted many of our clients in analysing and mitigating the regulatory, financial, cyber-security, data privacy risks.”

Many would agree that the fintech sector places unique demands on lawyers and law firms.

“Clients often demand a combination of multi-jurisdiction coverage, familiarity with the latest regulatory initiatives and knowledge of market practice and technology,” says Yang from Clifford Chance. “We have historically already been strong on the first two points and have been developing market knowledge since the beginning of this trend.”

“Increasing demand brings with new business opportunities but dealing with the innovation that is based on the compliance with current laws and regulations is a challenging task,” says Liu. “Legal service professionals in this area first need to familiarise themselves with the new technologies and understand the primary concerns of legislators and regulators, so that they can figure out the key underlying legal issues to provide commercial and correct advice to clients.”

“The novelty of fintech means that lawyers are often advising on issues where law and regulation are still trying to catch up,” says Yang, citing the debates on whether certain cryptocurrencies constituted “property” as an example. “The definitions were often developed before we even had computers, much less distributed ledgers,” he says. “It is important for lawyers to understand regulatory intention as well as adopt a more purposive approach to interpretation, as the letter of the law will often not be adequate in such a new area.”

Ding echoes his view: “Attorneys must adapt to the fast-growing speed of fintech industry, by continuing monitoring industry development, researching on global regulatory frame-work and discussing the matter with relevant regulators.”

“Fintech attorneys must understand the industry, they need to understand existing laws and regulations while being able to forecast the future development of the regulatory framework,” says Ding. “We need to protect our clients’ legitimate interests under the existing legal framework and help them formulate future business plans.”

Additionally, as Chinese companies venture into other markets, being able to serve international clients is also a competitive edge among fintech lawyers.

“Chinese fintech attorneys must also be global. We shall actively work with fintech attorneys abroad, keep good relationships with international regulators and make our voice heard,” says Ding. “We also need to help China fintech companies to go abroad by assisting them to fully comply with local laws and regulations.”

WORK FOR LAWYERS

“Increasing demand brings with new business opportunities but dealing with the innovation that is based on the compliance with current laws and regulations is a challenging task,” says Liu. “Legal service professionals in this area first need to familiarise themselves with the new technologies and understand the primary concerns of legislators and regulators, so that they can figure out the key underlying legal issues to provide commercial and correct advice to clients.”

“The novelty of fintech means that lawyers are often advising on issues where law and regulation are still trying to catch up,” says Yang, citing the debates on whether certain cryptocurrencies constituted “property” as an example. “The definitions were often developed before we even had computers, much less distributed ledgers,” he says. “It is important for lawyers to understand regulatory intention as well as adopt a more purposive approach to interpretation, as the letter of the law will often not be adequate in such a new area.”

Ding echoes this view: “Attorneys must adapt to the fast-growing speed of fintech industry, by continuing monitoring industry development, researching on global regulatory frame-work and discussing the matter with relevant regulators.”

“Fintech attorneys must understand the industry, they need to understand existing laws and regulations while being able to forecast the future development of the regulatory framework,” says Ding. “We need to protect our clients’ legitimate interests under the existing legal framework and help them formulate future business plans.”

Additionally, as Chinese companies venture into other markets, being able to serve international clients is also a competitive edge among fintech lawyers.

“Chinese fintech attorneys must also be global. We shall actively work with fintech attorneys abroad, keep good relationships with international regulators and make our voice heard,” says Ding. “We also need to help China fintech companies to go abroad by assisting them to fully comply with local laws and regulations.”

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