Lexia Avvocati is an independent law firm with extensive knowledge and experience in fintech, blockchain technology and Decentralized Finance (DeFi) dynamics. The firm supports Italian and foreign clients, such as banks, funds, exchange platforms, wallet providers and digital asset providers, in the launch and management of their operations in Italy and in dealing with the relevant regulatory authorities. Thanks to its multidisciplinary team, Lexia advises in relation to all issues affecting companies operating in the sector, starting from corporate, tax and regulatory issues to the fields of personal data protection, cybersecurity, intellectual property and consumer protection. We talked about it with Angelo Messore, partner at Lexia, and Francesco Dagnino, managing partner and founder.

What do you believe are the most important challenges to date from a legal perspective that the Fintech world is facing?

One of the main challenges for fintech projects is definitely the absence of a clear legal framework. Indeed, it is well known that technology develops faster than the law. But if the law does not provide a transparent environment for innovation, there cannot be a level playing field between innovative projects and market incumbents (or between domestic players and foreign competitors). An example can be seen in the recent EU regulation on crowdfunding, which Italy has not yet implemented. We know of a number of Italian crowdfunding platforms that are waiting for the Italian state to publish implementing regulations in order to become fully operational on a European scale. In these cases, the lack of a well-defined regulatory environment creates a clear competitive disadvantage for fintech companies.

Are there any major new developments in Europe that those operating in the fintech sector need to be aware of?

European institutions are often criticized for their overly conservative approach to regulating fintech entities compared to other countries. Indeed, they try to strike a balance between consumer and investor protection on the one hand and openness to technology and financial innovation on the other hand – a task certainly not easy to accomplish.
In recent years, the EU has taken several steps to stimulate innovation in the financial market, notably through the Fintech Action Plan and the Digital Finance Package. In this context, a key role in shaping the rules for Fintech operators will be played by the recently approved EU regulation on the “pilot regime” for tokenized financial instruments and the EU regulation on cryptocurrency markets. Other initiatives that Fintech operators should keep an eye on include the ongoing review of the EU anti-money laundering framework, the entry into force of the EU regulation on crowdfunding, the proposed legislation to create a legal framework for the use of artificial intelligence, and the current discussion on the regulation of buy-now-pay-later (BNPL) services.

When you work along with an emerging fintech company, what are the most frequent issues you face and how do you support it?

The crucial challenge we meet with our clients is to bridge the gap between the business idea they have and its implementation in accordance with the current regulatory framework. When working on Fintech projects, there are many technical, operational, business, financial, marketing, and legal issues. However, sometimes Fintech companies decide to postpone legal analysis by focusing on the other aspects of their project. In doing so, they underestimate the importance of the legal framework for defining their business model.
As legal advisors, we must first understand the innovative sector in which the client operates and its business model in order to design the best legal solution. Fintech companies operate in a highly regulated environment and must be aware of all the legal complexities of the sector in which they operate, as well as the opportunities that the regulatory framework offers them. We support founders in defining and structuring their business idea taking into account all relevant legal constraints, as well as in approaching regulators to identify the appropriate legal framework for their project.

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The Italian FinTech Sandbox is the main topic of the mentorship session given by Giovanni Carotenuto, owner of Carotenuto Studio Legale, one of the professionals who have chosen to become part of pur community. Let’s find out what is his opinion and which are the most important developments about this innovative regulatory initiative

Sandbox FinTech in Italy: where are we?

The Italian FinTech Sandbox (the “Sandbox”) has been introduced by means of Ministerial Decree no. 100 of 2 July 2021 (the “Decree”), which entered into force on 17 July. The Decree also established a FinTech Committee, chaired by the Minister of Economy and Finance and composed by the main Italian regulators, which is in charge of monitoring and fostering the development of FinTech in Italy, as well as keeping contacts with operators and competent foreign and EU authorities. The Sandbox comes at the end of a long process, which has seen the launch of several initiatives (such as, among others, the establishment of the Bank of Italy’s Fintech Channel and, lately, Milano Hub and the “Consob-Tech” project) enabling the dialogue with FinTechs in order to promote the development of innovative projects.

What are the main advantages of this initiative for a FinTech operating in our country?

The Sandbox’s main goal is to create the conditions for promoting the digitalisation of our country. To this end, the Decree has established a controlled environment where FinTechs can test technologically innovative services and products in the banking, finance and insurance sectors. In brief, the procedure envisages

1. an initial admission phase, during which the applicant may informally consult with the competent supervisory authorities, in order to check whether it meets the requirements set forth by the Decree,
2. a start-up phase with the definition of the testing’s modalities,
3. the actual testing phase, which has a maximum duration of 18 months, but it may be extended if certain circumstances are met.

In other words, the FinTechs that intend to test innovative solutions may enjoy a temporary simplified regime, while dialoguing with the main Italian regulators. In light of the foregoing, the Sandbox offers to FinTechs the advantage to carry out a legal, financial and economic analysis of a service or productthey intend to offer, which meets certain requirements, in a safe environment where they can informally liaise with the competent authorities and enjoy, for a temporary period of time, less stringent rules than those normally applying in order to provide for such service or product. At the same time, the competent supervisory authorities can closely monitor the dynamics of the FinTechmarket, and identify the most appropriate regulatory interventionsfor fostering the development of such market while enhancing the protection of consumers. In turn, FinTech operating in Italy can save money and attract foreign and domestic investments, whether institutional or not.

How could a FinTech take advantage of opportunities provided by Sandbox? Any tips?

FinTechs may choose to apply for the Sandbox’s program to see whether a proposed service/product is “fit” for being launched on the market.In this respect, it is interesting to recall the UK experience, where a similar regulatory sandbox was setup in 2014 by the Financial Conduct Authority. According to the latter’s report thereon, issued in 2019, such program has allowed FinTechs to refine technology and developed better business models, finding greater ease of entry by halving the time to obtain regulatory approvals, whilst incentivising the same to stay in the market. Indeed, 90% of the companies that completed the testing phase have continued to pursue their business initiatives afterwards and almost all of them are still in operation today, whilst 76% of those admitted to the first group remained in business after 2 years and many of the interested FinTechs have expanded their business and obtained approvals for conducting further testing. Moreover, British investors have been found to be more likely to take advantage of a service/product tested in a protected environment, than of anuntested one. Finally, the UK FinTech sandbox has proven to be able to attract investments, taking into account that 17 out of 44 start-ups were acquired, or received over £135 million in funding,during the testing phase.

Which are the aspects of the Decree that could be enhanced in your opinion, and why?

The Sandbox’s regime (as regulated in details by the Decree) seems to have the right credentials for becoming a success by boosting the FinTech market in Italy. Of course, there is a risk that the testing may result in a duplication of the licensing procedure, since the operator that intends to continue to carry out its business after the testing must in any case start a new path leading to the authorisation of the service/product in question (and this means additional costs and time). Moreover, as ESAs’ joint report on sandboxes and innovation centres issued on January 2019 seems to highlight, there is a need for a stronger coordination among NCAs at EU level, where, at present, there is no mechanism promoting the spread of financial innovation throughout the Union, leaving room to the risk of regulatory arbitrage among Member States. In conclusion, it remains to be seen whether this may lead to the introduction of a EU-wide testing procedure, which would allow a FinTech that has successfully concluded experimentation in a given Member State to take advantage thereof and proceed to thenext steps in the rest of the Union.

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