Jayems Dhingra[1]

 

ABSTRACT

The traditional banking laws, central bank regulations and international Correspondent Banking Relationship (CBR) protocols, have been the key driver of global trade for more than a century. Without movement of money across jurisdictions and supporting legal framework and electronic communications, commercial trade could not have flourished to the present levels. The technological advancement in the internet age is fast surpassing the electronic or digital transaction platforms established in the 1980s, after reliance on Morse code & telegrams for money transfers. There is a nostalgic aura with the term TT i.e. telegraphic transfer, about which the future generation may have no clue. However the internet technology based financial systems termed as fintech are transforming nostalgic term TT to IST (International Swap and Transfer), a futuristic term.

Thus fintech is capable of bypassing not only the national banking systems but can achieve seamless and borderless conquest of banking of international settlements. The international payment system involves two basic elements in a transaction: movement of funds and exchange rate mechanism. In context of trade in trillions of dollars, from users’ perspective, the movement of funds increases the costs of international procurements and doing business, due to additional cost of each transaction, through banks, and foreign exchange commissions (Forex). Till recently, Banks and licensed financial institutions had enjoyed a privileged oligopolistic position of assured income from such transactions.  The fintech is not only causing digital disruption for the banking sector but inviting an influx of new platforms and international remittance services providers.

The fintech based platforms promise to reduce costs of transactions and offer full control to the users as “the customers”, instead of being dependant on the banking protocols and delays. This Paper surveys the current regulatory regime and challenges being posed for the authorities, to curb or detect money laundering and subversive activities. The key objective of this Paper is, to identify how the regulatory regime through UNCITRAL conventions, can support the new fintech entities, and complement the prevailing World Bank and BIS[2] recommendations. The second objective is to identify how it helps the internationally trading entities, and threatens the business models of modern banks by impacting sources of revenue generation through remittance transactions fee and forex commissions.

The starting point for debate on international cooperation for remittances was through the adoption of the United Nations Convention on International Bills of Exchange and International Promissory Notes in December 1988. It was a natural progression to support the two older legal regimes of international sale of goods (CISG)[3] and international commercial arbitration (UNCITRAL Model Law of Arbitration)[4] but did not get beyond the five signatories. At national level in most of the developed and developing countries there are regulations for licensing, supervision and controlling payment services, stored value facility holders, credit card payments, PayPal, WorldPay, AliPay, eNets, remittance companies and money changers. The legal framework for licensing varies with jurisdictions. The licensing and operability regime, for new borderless fintech platforms, is not adequately addressed in existing legal framework for international payments. The countries like Singapore and Switzerland are currently reviewing their ordinances[5] to allow for such operators to function. This may enhance the status of such states from global financial centre to become e-payment nations.

The emerging fintech trends for example are empowering business entities through peer-to-peer currency swap, user driven online direct transfer platform, and foreign exchange payment through local transfer. The fintech platforms are likely to take away the complexities between financial transactions and trade specific or contractual obligations, thus seamless flow of funds. The contractual payment terms and platform for settlement of payments may become the terms of an international contract. Thus without a well-structured legal regime fintech may create unprecedented risks. This Paper endeavours to make a case for the development of UNCITRAL Rules for International Payment Systems for Trade, encompassing dispute resolution and international arbitration forums. The “United Nations Convention on International Bills of Exchange and International Promissory Notes” may be put to rest. However the need for UN Convention on International Payments in context of fintech besides the role of BIS is essential due to direct agreements between the trading entities and payment services platform providers.

 

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The Paper was presented at UMCITRAL Emerging Conference 2016 held at Macau

Readers interested in the full paper, may send a request to customerdesk.tmc@tiberiasmc.com

 

References

[1] Jayems Dhingra is a Principal Management Consultant with Tiberias MC, Singapore and also practicing international arbitrator and business advisor.

[2] Bank for International Settlements, Basel, Switzerland a member organization with Central Banks of 60 jurisdictions as members, making up to 95% of world GDP

[3]  UN Convention on Contracts for International Sales of Goods, 1980

[4]  UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006

[5] The Acts related to  Payment Systems (Oversight), Money Changing and Remittances Businesses, New Licensing Categories for fintech innovators etcetera