The world of financial services is being upended by new technologies—from virtual currencies and blockchain to peer-to-peer lending and enhanced mobile banking—that are capturing customers, as well as the attention of Wall Street investors and industry regulators.
While it may be too early to tout financial technology as its own well-defined practice area, the innovations and industry disruption associated with fintech should have law firms and lawyers snapping to attention. For law firms, it’s certainly a moment to market their expertise across practice areas to clients, to recruit the right talent and to ready themselves for potential business opportunities.
Several firms are already marketing fintech industry groups staffed largely by lawyers in existing practices. Among the Am Law 200 firms on Chambers & Partners recent ranking of blockchain and cryptocurrency specialists were Goodwin Procter; Davis Polk & Wardwell; Perkins Coie; Morrison & Foerster; Polsinelli; Cooley; McDermott Will & Emery; and Baker & Hostetler.
To bolster their ranks, firms and in-house departments have also stepped up the competition for lawyers with fintech bona fides. In February, for instance, Marco Santori, one of the best-known lawyers on legal issues surrounding blockchain and virtual currency, moved from Cooley to become president of the bitcoin services company BlockChain. Santori had been one of the leaders of Cooley’s fintech group and had moved to the law firm from Pillsbury Winthrop Shaw Pittman in December 2016 along with Patrick Murck, another virtual currency expert.
Baker McKenzie recently beefed up its financial technology practice with veteran IT practitioner Daniel Logan, a Toronto-based partner who moved from McCarthy Tetrault. And last October, a three-lawyer team led by partner Lee Schneider jumped from Debevoise & Plimpton to McDermott to help boost that firm’s fintech efforts. (Schneider is also a thought leader on financial technology legal issues and co-hosts the fintech podcast “Appetite for Disruption.”)
The lateral moves and cross-industry practice groups have occurred amid a flood of headlines about virtual currency, its value and its future. Litigation and regulatory questions are already erupting for clients, and are only expected to accelerate as the digital currency market matures.
On the regulatory front, the most recent action has centered on digital currency trading. In January, the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission issued a warning that they would bring enforcement actions over digital currency offerings. The CFTC did, suing three companies over their cryptocurrency efforts. At the end of February, the Wall Street Journal reported that the SEC had “issued dozens of subpoenas and information requests to technology companies and advisers involved in the red-hot market for cryptocurrencies.” A few days later, a U.S. District Court judge ruled that cryptocurrencies such as bitcoin could be regulated as commodities, a direct result of one of the CFTC lawsuits. Also, in early March, the SEC warned that cryptocurrency exchanges risk operating illegally over disclosure issues.
International regulators have been weighing in as well. China said in March that currency-related technology requires more centralized regulation. And the European Union in February signaled that it will increase regulatory scrutiny of virtual currency if the industry does not do more to address investor risk and prevent money laundering.
That kind of regulatory scrutiny, and the ongoing volatility surrounding bitcoin’s value, may not seem like a recipe for an enduring legal practice. But digital currency is just the best-publicized of an array of developing financial technologies that require firms’ attention. Robo-advisers such as Betterment are already using algorithms to automate investment advice for customers. “Insurtech” and “regtech” applications are relying on technology to help simplify insurance and compliance. Such tools as Mint are linking financial institutions to help customers manage their money in one place.
Many of the fintech players are deploying blockchain, which is the technology underlying digital currency. Blockchain is a digital ledger that keeps real-time chronological and public records about transactions made in bitcoin or another cryptocurrency. The technology removes the need for a third party, such as a bank, to verify a transaction and to keep records about it.
“Proponents,” Bloomberg wrote in January, “believe potential blockchain applications go far beyond the cryptocurrency world, and could have an internet-like, transformational effect on the way business will be transacted across sectors, from health care to finance.” According to Investor’s Business Daily, blockchain usage will accelerate dramatically in the next few years. “Blockchain is estimated to have delivered $4 billion in business value-add or technology innovation in 2017, with that growing to $21 billion by 2020, $176 billion in 2025 and $3.1 trillion by 2030,” the newspaper said.
The potential for explosive growth is pushing companies to invest in blockchain and to begin testing its potential application in their businesses. Bloomberg noted that MasterCard is now allowing businesses to send money over a blockchain platform, and IBM and a unit of Comcast are now supporting a blockchain investment startup fund.
Naturally, lawyers are being hired to help startups, larger companies, and investors capitalize on the technology, defend intellectual property and grapple with the myriad cybersecurity issues inherent in blockchain. Expect more of the same as additional venture capital enters the space.
That’s just a start. Because blockchain represents a fundamental shift in the way digital data is processed, stored and shared, it’s likely to create profound legal questions that cross regulatory and industry boundaries. “I feel like everybody is talking about blockchain like an industry that needs to be separately regulated, where in fact blockchain is a technology that gets implemented in different industries,” McDermott’s Schneider told Bloomberg. “So if you’re going to use blockchain in health care, you need to figure out what health care laws apply, if you’re going to use it in the energy sector, you need to figure out what energy regulations apply.”
As law firms work to respond, they’ll need to avoid overspecialization and instead embrace a flexible, cross-practice approach that will allow them to pivot as necessary to adapt to a fast-changing and relatively new sector. Schneider offers a prime example. His online biography presents his blockchain and financial services tech credentials, noting that he works with transactional lawyers on ICOs (or “internet coin offerings”). Yet it also touts his ability to counsel “clients on a wide range of matters, including regulatory and enforcement issues, conduct of business questions, and general corporate concerns.”
Similarly, firms that have created groups to respond to fintech clients are wisely offering expertise across a number of practice disciplines. Perkins Coie, which has actively marketed its fintech expertise, says on its site that it counsels fintech companies on regulatory compliance, consumer protection, privacy, intellectual property and business transactions. Perkins Coie lists more than a dozen specific capabilities, from “decentralized crypto-currency programs” to “loyalty and membership cards and ‘points’ programs.”
Among the laterals who have moved to fintech groups in the last few years, many share backgrounds in emerging companies, venture capital, and cybersecurity practices. Cooley’s Murck, for instance, was previously involved in a number of startups as an employee, entrepreneur and adviser and was a co-founder and former general counsel and executive director of the Bitcoin Foundation. In addition, robust securities litigation, banking regulatory, corporate/transactional, and tax backgrounds are in demand.
In other words, firms that hope to capitalize on fintech should understand that, at least for the foreseeable future, this will be a multidisciplinary space. They should be prepared to handle a very diverse array of potential matters from a disparate group of clients. Successful fintech players will be representing traditional financial institutions and Fortune 500 corporations alongside blockchain and other emerging technology companies.
As for talent, firm managers will need individuals with a keen interest and expertise in technology and data, and who are entrepreneurial when it comes to generating work. The space is relatively new and requires lawyers with relevant contacts to build a book of business. Those lawyers will need to actively network with individuals and organizations forming in the fintech space and to have their fingers on the pulse of the tech market of their regions.
They’ll also need to be deeply aware of Washington’s role in the industry. Regulation could alter the playing field overnight. The Office of the Comptroller of the Currency, in particular, is being closely watched to see if it will support the creation of a national banking charter for fintech firms. An initial proposal by OCC has been met with litigation from state regulators.
Given the potential legal issues at play, it’s entirely possible that fintech will require its own, specialized area of practice in the years to come. The law and the technology are still developing. That doesn’t mean, however, that firms and lawyers should wait to make a move. The potential for industry and economic disruption is immense in the short and long term, particularly where blockchain is concerned. Firms with a stake in the financial services industry should be looking to make connections and building a talent pool if they want a piece of the business to come.
Originally published on March 26, 2018 on Law.com