An age of disruption

An ongoing wave of digital innovation is disrupting the world of business, setting the financial industry as its primary target. In recent years, the market in financial technology (fintech) has been growing at an overwhelmingly fast rate. Fintech companies utilise digital technology to offer simple, innovative and cost-effective ways for businesses and individuals to fulfil their financial requirements. An example of a successful fintech company is TransferWise, a peer-to-peer service that promises to charge lower fees than banks for international money transfers. A recent report commissioned by the Government estimates that the fintech market in the UK currently generates around £20 billion in annual revenue. As customers become increasingly dissatisfied with the limitations of traditional banking firms, we can only expect this trend to continue.

A specific type of disruptive technology is the blockchain, which experts compare in importance to the emergence of the Internet. A blockchain consists of a chronological database of encrypted transactions that are recorded by a network of computers. These computers synchronise periodically to ensure that they all share the same database, enabling the network to reach consensus on the validity of new transactions. Blockchain technology therefore dismisses the need to rely on a controlling authority to verify all transactions. This technology has already been applied to digital currencies like Bitcoin to enable the seamless transfer of funds around the globe. The blockchain is also being used to power smart contracts. Having formalised a contract’s provisions into source code, parties can use a distributed database to confirm that an event or condition has occurred without the need for third party intervention. Not only do smart contracts allow for self-executing transactions, but they also prevent problems arising from the open texture of language. So far, smart contracts have predominantly been used to automatically execute derivatives.

The third topic that we wish to explore is big data. With the digitalisation of communication and payment systems, the amount of data available on the Internet has exploded. Analysts estimate that every minute we send 204 million emails, generate 1.8 million Facebook likes and send 278,000 tweets. Firms that are able to collect large volumes of data from customers can capitalise on the aggregate value of their information. The analysis of this “big data” enables firms to connect users, anticipate consumer trends and create personalised advertising to suit individual profiles. Big data has facilitated the rise of the sharing economy, a sector led by firms like Uber and Airbnb with innovative business models that do not revolve around the ownership of physical assets. Regulators are also evaluating the possibility of analysing data trends to predict how people may react to policies under consideration. In all these cases, friction is caused by issues of privacy and security. As we continue to implement technology into everyday objects like cameras and watches, a process that is referred to as the “Internet of Things”, the amount of personal information that is aggregated by businesses will further increase.

Case study: The DAO, or how to steal $55 million with no legal consequences

One of the most intriguing applications of blockchain technology involves the creation of ‘The DAO’, an instance of decentralised autonomous organisation. Underpinning these decentralised organisations are multiple smart contracts, which lay down specific rules and procedures defined by code. The result is the creation of a digitalised constitution. Transactions occur only once shareholders have voted for them, allowing shareholders to participate in all aspects of decision-making. These transactions are recorded into a blockchain, which reduces operational costs and provides a transparent trail of the organisations’ dealings. Academics have noted that the concept behind decentralised autonomous organisations transforms Jensen and Meckling’s theory of the firm as a nexus of contracts into reality. These corporate structures raise novel questions around traditional conceptions of legal personality, agency and the passivity of shareholders.

The DAO was one of the most prominent attempts to create an autonomous decentralised organisation. It was formed in April 2016 as a venture capital fund that would invest digital currency in accordance with the wishes of its shareholders. Two months after its launch, The DAO had raised over $100 million in the largest crowdfunding campaign in history. Shortly after, the organisation was subjected to a hack that exploited vulnerabilities in the code. As a result, the hacker was able to siphon off the equivalent of $55 million in digital currency. In a letter subsequently addressed to investors, the hacker claimed that he had committed no theft since the removal of funds resulted from specific features of the code. Faced with no prospect of bringing legal action, given that The DAO’s existence was confined to the digital realm, investors initiated a process to distribute the remaining capital. This brief case study serves as a wake up call for legal practice and regulators to come to grips with disruptive technologies.

The aims of our society

A group of students in the MSc in Law and Finance programme at the University of Oxford has decided to set up a Fintech & SmartLaw Society (FSS) to explore the issues discussed above. Our primary goal is to foster a thought-provoking discussion about the impact that these innovations will have on business, legal practice and regulation. There are also practical advantages of learning about disruptive technologies. Those who are up to date with recent innovations may be rewarded as new opportunities to work in fast-growing technological markets arise.

This academic term, we plan to host a three-piece series of seminars to discuss the topics of fintech, blockchain and big data. We are pleased to note that interest in disruptive technologies has recently been high on this blog, with articles about crowdfunding and blockchain having already been published this month. We hope that academics, business professionals and students who have an interest in discussing this topic will join us in our quest.