The REGTECH Book The Financial Technology Handbook for Investors, Entrepreneurs and Visionaries in Regulation

The Regulatory Technology Handbook

The transformational potential of RegTech has been confirmed in recent years with US$1.2 billion invested in start-ups (2017) and an expected additional spending of US$100 billion by 2020. Regulatory technology will not only provide efficiency gains for compliance and reporting functions, it will radically change market structure and supervision. This book, the first of its kind, is providing a comprehensive and invaluable source of information aimed at corporates, regulators, compliance professionals, start-ups and policy makers.

The REGTECH Book brings into a single volume the curated industry expertise delivered by subject matter experts. It serves as a single reference point to understand the RegTech eco-system and its impact on the industry. Readers will learn foundational notions such as:  

•    The economic impact of digitization and datafication of regulation  

•    How new technologies (Artificial Intelligence, Blockchain) are applied to compliance

•    Business use cases of RegTech for cost-reduction and new product origination

•    The future regulatory landscape affecting financial institutions, technology companies and other industries

Edited by world-class academics and written by compliance professionals, regulators, entrepreneurs and business leaders, the RegTech Book represents an invaluable resource that paves the way for 21^st century regulatory innovation.

JANOS BARBERIS is a Millennial in FinTech, recognized as a top-35 global FinTech leader. He founded FinTech HK, a thought leadership platform, and the SuperCharger – a FinTech Accelerator that strategically leverages on Hong Kong as a gateway to Asia. In parallel, he sits on the advisory board of the World Economic Forum's FinTech Committee and is a PhD Candidate at Hong Kong University Law School.

DOUGLAS W. ARNER is the Kerry Holdings Professor in Law at the University of Hong Kong and one of the world's leading experts on the intersection between finance, technology and regulation. He has advised on financial sector regulatory issues in markets across Africa, Asia, Australia, Europe and North America, with governments, international organizations including the Asian Development Bank and the Alliance for Financial Inclusion, and private sector institutions. Douglas has published 15 books and over 150 articles, chapters and papers on related subjects. He led the development of the world's largest massive open online course (MOOC): Introduction to FinTech, launched on edX in May 2018, now with over 35,000 learners spanning every country in the world.

ROSS P. BUCKLEY is the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation, and a Scientia Professor, at UNSW Sydney. His research focus is on FinTech, RegTech and blockchain. He chairs the Digital Finance Advisory Panel of the Australian Securities and Investments Commission (ASIC). He consults regularly to the Asian Development Bank, and has consulted to government departments in 10 countries, including Australia and the US. He has twice been a Fulbright Scholar, at Yale and Duke.

A FinTech and RegTech Overview: Where We Have Come From and Where We Are Going vi

About the Editors xii

Acknowledgements xiv

1. Introduction

What a RegTech Compliance Killer System Will Look Like 6

Technology-Enabled Collaborative Compliance 10

The Age of RegTech Disruption to the Status Quo Is Here 16

RegTech and Financial Crime Prevention 20

RegTech: Tackling Regulation with Innovation 26

Identities, the RegTech Holy Grail 30

2. The RegTech Landscape

Islamic RegTech 38

How RegTech Could Help Determine the Future of Financial Services 44

Introducing the RegTech Quality Compass: The Five Factors of RegTech Quality 50

How Banks Are Managing Their Risk Through Technology and Market Infrastructure 55

RegTech and the Science of Regulation 58

GDPR and PSD2: Self-Sovereign Identity, Privacy, and Innovation 62

Rise of RegTech in the German Market 66

The Power of RegTech to Drive Cultural Change and Enhance Conduct Risk Management Across Banking 70

3. Regulatory Innovation and Sandboxes

Discover the Innovative Technology Behind RegTech Leaders 80

Enabling RegTech Up Front: Unambiguous Machine-readable Regulation 85

Align Open Banking and Future-Proof RegTech for Regulators and Third-Party Providers to Deliver the Optimal Consumer Convenience and Protection 89

A Seat at the Table – Bringing the Voice of FinTech to the US Regulatory Process 93

Sandbox Games for RegTech 99

Legal Guidance for Entering the Sandbox and Taking Advantage of Cross-Border Cooperation Agreements 102

RegTech and the Sandbox − Play, Innovate, and Protect! 106

4. A Call for Innovation or Disruption?

Governance, Risk, and Compliance: Complex or Complicated? 118

Innovation or Disruption: Not Always Black and White 122

How to Use Digital Marketing Data in Regulated Industries 126

Invention Versus Reinvention 130

Making Regulation Machine Readable 134

Can We Digitize Know Your Client? 138

5. RegTech Investment and Compliance Spending

Why a Substantial Investment in Financial Services RegTech Now Will Strategically Reduce Your Future Regulatory Compliance Costs 146

Old Tech + New Tech = RegTech: Excel Spreadsheets and End User Computing in a Regulated World 150

Will Financial Institutions Ever Achieve a 100% Compliance with Anti–Money Laundering and Combating the Financing of Terrorism Rules? 154

Merits and Demerits of a Shared Risk Engine 158

Spend on Compliance: A Necessary Evil orBusiness Enabler? 163

6. RegTech for Authorized Institutions

RegTech Opportunities in a Post-4MLD/5MLD World 172

Passporting in the EU – Is an Opportunity Also a Problem? 177

What Do PSD2 and Similar Activities Mean for Banks and FinTech Start-ups? 181

7. RegTech from a Regulatory Perspective

The Role of Anti–Money Laundering Law and Compliance in FinTech 190

Banking Supervision at a Crossroads – RegTech as the Regulators’ Toolbox 195

FinReg, FinTech, and RegTech – Quo Vadis, EU? 199

The RegTech Landscape from a Regulator’s Perspective 205

RegTech is for Regulators Too, and its Future is in

Emerging Markets 210

8. Blockchain and AI in RegTech

The ROI of RegTech 218

The Augmented Compliance Office 221

Dissolving Barriers: A Global Digital Trust Protocol 226

Can AI Really Disrupt Monitoring for Suspicious Activity? 231

Forging a Responsibility and Liability Framework in the AI Era for RegTech 235

Compliance with Data Protection Regulations by Applying the Blockchain Technology 246

Blockchains Are Diamonds’ Best Friend: The Case for Supply Chain Transparency 250

9. RegTech Applicability Outside the Financial Services Industry

Protecting Consumers and Enabling Innovation 260

RegTech Impact on the Private Security Industry 263

ArtTech: How Blockchain Can Improve Provenance 266

The Potential of RegTech in Improving the Effectiveness of Environmental Regulation 270

RegTech Applicability Outside the Financial Services Industry 274

Using RegTech as a Cross-Industry Digitization Tool 278

RegTech Unleashed: Discovering the Pathways Beyond Finance 282

RegTech Outside Finance: Four Options, One Clear Choice 287

RegTech: A Safe Bet for Tackling AML and Fraud in the Gambling Sector 292

10. Social Impact and Regulation

The FinTech Ecosystem Between Legal Compliance and Social Dimension 300

The End Justifies the Means: Putting Social Purpose Back at the Heart of Banking and Financial Regulation 305

RegTech’s Impact on Trust and Identity 310

How Technology Is Driving Financial Inclusion 314

Banking the Unbanked and Underbanked: RegTech as an Enabler for Financial Inclusion 318

Superhero Way: Enhancing Regulatory Supervision with Superpowers 323

11. The Future of RegTech

Market Surveillance 2020 330

I Regulate, Therefore I Am? Regulating Humans’ and Machines’ Conduct and Culture 335

The Future of RegTech 340

From RegTech to TechReg – Regulation in a Decentralized World 344

Emerging Innovations in RegTech 348

List of Contributors 351

Index 358

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