When The Legal 500 United States 2019 launches in May 2019, it will include, for the first time, a dedicated ranking for fintech practices.
Unless you’ve been living on Mars for the past five years, you’ll be very familiar with the term – as well as some examples such as cryptocurrency and peer-to-peer lending – so it’s fair to wonder what’s taken us so long.
The simple reason is that, in the legal realm, the practice is still in its nascent stages. While there are now many organisations – from startups to emerging companies to established financial institutions – that are either firmly ensconced in the field, or else pure-play fintech businesses, the number of attorneys who can legitimately call themselves ‘fintech specialists’ is still relatively small.
‘Lots of lawyers have pieces of it,’ says New York-based Sullivan & Worcester partner Joel Telpner, ‘but to live it day in, day out, it’s still a relatively small pool. We’re probably still at the point where, if you ask different lawyers at different firms, you probably won’t get consistent answers about what it involves – people think differently – but there’s nothing wrong with that; it’s typical with new areas.’
In the case of fintech, one of the big reasons for divergent views is related to the fact that the practice sits at the intersection of financial services and technology – ‘those
are two industries with radically different cultures,’ says David Luce, a partner at DLA Piper in New York.
Luce jokes that, like Tom Hanks in Bridge of Spies, ‘he’s really just an insurance lawyer’, so for him – who says his journey into fintech has been less about foresight and more about moving with his clients – ‘it’s been like a middle-aged dog learning new tricks. It’s been a really interesting journey.’
Fellow DLA Piper partner Margo Tank has a longer history in the field – in fact, it’s a journey that can be traced back nearly 25 years. Tank, who’s based in DC, moved into private practice with Goodwin Procter in 1996 – having previously been counsel to the House Banking Committee; at the time, the internet was really taking off.
‘Because we were positioned in financial services,’ says Tank, ‘we had a lot of our large banks saying, “hey, can we use the internet as a platform to go direct to consumers”. And then we had technology companies – Intuit and Microsoft, for example – saying, “hey, we have these great technology platforms, can we act as finders or facilitate the offering of financial services”. So, we brought some of these companies together.’
Tank’s practice has continued along these lines ever since, through the transition to paperless transactions around 1998 (the ‘first wave of fintech’), the first iteration of payment technology in the early 2000s, the arrival of Bitcoin in 2011, and up to the present day.
‘We’ve been watching this evolution over time where you have the traditional banks and the technology companies competing or at odds with each other, but also needing each other to be able to fully utilise the medium,’ says Tank.
Bringing these opposing forces together has been a challenge, says Tank: ‘Years were spent lost in translation, where you’d have conversations with the financial institutions and technology providers and people would just talk past each other. We, as lawyers, had to bridge that gap.’
‘It takes creative lawyering,’ Luce adds. For lawyers from a financial services background, it also takes getting to grips with the technology, which isn’t for everyone.
As New York-based Joel Telpner puts it, ‘I find it exciting – it doesn’t make me feel queasy like it does for some lawyers.’ By his own admission, Telpner, an expert in blockchain, is among the older guard in the fintech space. ‘Most lawyers in this space,’ he says, ‘are at the younger end of the spectrum’ – and it’s constantly attracting more. ‘It’s so cool to see all of these young associates literally lining up outside of the door wanting to get involved’; aside from the technology itself, it’s one of the reasons that the practice is so dynamic.
So how did Telpner get involved? Much like Luce, ‘it wasn’t a radical transition – but there was a catalyst’. Back in 2014, Telpner assisted Overstock as the first company to list securities on the blockchain. ‘It took two years,’ explains Telpner, ‘as we had to educate the SEC on what the blockchain is and the regulatory consequences, so by the end of it I was very involved in the blockchain space.’
This gets at the heart of the fintech practice, and the reason it’s such an interesting and challenging space to operate. On the one hand there are new, powerful, disruptive technologies, while, on the other, strict regulatory and compliance infrastructure.
‘To give an example,’ says Tank, ‘the tech companies want to know, “why can’t we have the customer click once instead of many times – it’s easier that way”, but the financial institutions say, “no, we are in a very regulated environment and we need to make sure that the customer sees, reviews, and clicks ten times – or whatever the requirements are.’
The challenging thing is that the regulators haven’t said much in the last 20 years; as Tank puts it, ‘they’ve decided to let a thousand blossoms bloom and then eventually they will probably step in.’ The regulators are holding hearings, doing studies, and generally trying educate themselves, but in the meantime lawyers are having to navigate their clients through the established infrastructure.
Howard Altarescu is a partner in Orrick’s New York office. From his perspective, as someone from a financial services background, ‘certain areas are nascent, but in other areas we’re talking about longstanding issues. For instance, what is or isn’t a security? These are things we have looked at for a long, long time.’
Altarescu began moving into the fintech space around six or seven years ago, when he started seeing deals among market-based lenders (Oportun was an early client – and still is). Not long after, in 2014, the firm welcomed Christopher Austin, whose background is as a tech company lawyer, meaning he comes from the other end of the spectrum from Altarescu – as well as the other attorneys interviewed.
‘I’ve been a tech company lawyer for the majority of my career,’ says Austin, who splits his time between New York and Silicon Valley, ‘and within the tech field I’ve always worked in a range of different areas. What’s really interesting about fintech is the regulatory element. I’ve worked with a number of clients trying to disrupt the payments world – once I’d done one of those it became much more natural to continue.’
Having a mix of perspectives is key, and successful fintech practices will invariably lean on specialists not just in the regulatory and technology aspects, but also in the intellectual property and tax implications.
‘It’s cross-disciplinary – truly – and it’s very exciting’, says Telpner. An interesting insight – perhaps something that’s not obvious – is that there’s a certain amount of risk involved. ‘When you have a new practice like this,’ says Telpner, ‘you have a lot of uncertainty – there are unknown pitfalls – so some firms don’t want to get involved. It’s an interesting dynamic as some of the biggest firms are sitting on the sidelines.’
This creates an opportunity for those who are ready to get involved and move with the latest developments. So what are the anticipated developments? Where are things likely to go?
‘It’s hard to know,’ says Austin, ‘the development of new platforms and ways of transacting is increasing but, at the same time, the big banks are not going away quietly. The march of change is going to continue to accelerate. I’m not sure that all existing financial institutions are going to survive – some will be disrupted – but many will.’
Telpner is expecting smart contracts to really take off. For those who are unfamiliar with the concept, a smart contract uses the blockchain and an if/then code to automatically execute a contractual obligation.
‘There’s a lot of debate now about how smart contracts can be used,’ says Telpner, ‘and there are interesting questions about whether lawyers need to be writing the contracts and thus do they need to know how to code.’
And on the cryptocurrency side, says Telpner, there’s ‘a fascinating debate about regulation that’s very similar to the early days of the internet – people saying it’s beyond regulation – and others saying you can regulate it but you need to think differently.’
‘In 2018,’ says Tank, ‘it was blockchain and AI. I think the focus in 2019 is going to be data security and privacy. It’s always been there, of course, but it will likely have a very big impact on fintech’.