The Governance of Blockchain Financial Networks

Since the emergence of the virtual currency Bitcoin in 2009, a new, Internet‐based way of recording entitlements and enforcing rights has increasingly captured the interest of businesses and governments. The technology is commonly called ‘blockchain’ and is often associated with a closely related phenomenon, the ‘smart contract’. The market is now exploring ways of using these concepts for financial assets, such as securities, fiat money and derivative contracts. This article develops a conceptual framework for the governance of blockchain‐based networks in financial markets. It constructs a vision of how financial regulation and private law should set the boundaries of this new technology in order to protect market participants and societies at large, while at the same time allowing the necessary room for innovation.     

Border Problems: Mapping the Third Border

The Internet has become the site of economically relevant objects, events and actions, as well as the source of potential risks to the financial systems. This article builds on a metaphor of ‘border problems’ in financial regulation, exploring a ‘third border’ between the ‘real world’ and ‘cyberspace’—a virtual domain of human interaction facilitated and conditioned by digital communications systems. Reviewing the ‘cyber-sovereignty’ debate and surveying the divergent approaches now emerging along geo-political faultlines, we argue that sovereign states still have a unique and irreplaceable role in guarding financial stability which must be reflected in the law of Internet jurisdiction: an emerging lex cryptographica financiera. We conclude with a few observations on how this could affect the design of financial regulation in the coming decade.     

Regulating Hedge Funds for Systemic Stability: The EU's Approach

This article offers a critical appraisal of the way in which the EU regulates hedge funds (HFs) in the Alternative Investment Fund Managers Directive (AIFM Directive) and its proposal to regulate the repo markets from which they obtain much of their leverage. It argues that the EU's scheme is not a radical departure from the pre‐crisis market liberalist approach and that its reliance on discretionary intervention is misplaced because it does not take account of the fundamental uncertainty that characterises financial markets. The article outlines the operations of HFs and explores the extent to which they pose a threat to systemic stability, paying particular attention to the use of leverage by HFs. It explores the background to the AIFM Directive and the post‐crisis international consensus on financial regulation and then evaluates the complex division of responsibility for regulating HFs between the national and supranational authorities. Finally, it discusses how HFs should be regulated. Drawing on the work of Minsky, it argues that a leverage cap would have been more likely to prevent HFs contributing to systemic instability than the scheme adopted. Nor are the proposed rules on mandatory ‘haircuts’ in repo markets or the AIFM Directive's rules on remuneration likely to prevent HFs contributing to systemic instability.     

Paradoxes and Failures: ‘New Governance’ Techniques and the Financial Crisis

This article examines the performance of four ‘new governance’ techniques of regulation in the period leading up to the financial crisis: principles based regulation, risk based regulation, meta‐regulation and enrolment. These techniques have been advocated on the basis that they are responsive, flexible, and in enrolling others in the regulatory project thereby expand its capacity, and even its legitimacy. However, experience in the crisis revealed that in their implementation they can be out of touch or indulgent, focus heavily on auditable systems and processes, and that in enrolling others they can increase vulnerabilities and the potential for negative endogenous effects. The argument is not that there should be a return to adversarial ‘command and control’ regulation, rather that experience of these strategies in the crisis suggests a need to understand in greater depth the refractive effects of the organisational, technical/functional and cognitive dimensions of regulatory governance, if we are to understand and adapt its performance in different contexts.     

Market definition as value reconciliation: the case of renewable energy promotion under the WTO Agreement on Subsidies and Countervailing Measures

The interrelationship between renewable energy support policies and World Trade Organization (WTO) law is an important recent manifestation of the challenge to reconcile environmental and economic values in contemporary societies. This article strives to contribute to the discussion by using the intersection between policies to support renewable energy, in particular sustainable biofuels in the EU, and the WTO’s Agreement on Subsidies and Countervailing Measures as a case study. The article discusses how efforts to promote renewable energy seem to have become contingent upon the core legal notion of ‘relevant markets’. The article further claims that this contingency is problematic: renewable energy markets are highly complex in practice, and combined with the WTO’s convoluted interpretations of ‘relevant markets’, the legal outcomes struggle to find the proper balance between appropriate support for sustainability and the prevention of protectionist market fragmentation.     

A Fresh Look at Stock Market Short‐termism

In this article, we develop a novel understanding of stock market short‐termism as a social phenomenon. Contrary to formerly popular academic belief, short‐termism is a problem that is highly unlikely to be structurally self‐correcting. An important driver of short‐termism typically elided within standard legal‐academic analyses is the informational centricity of modern stock markets, and resulting pressure on corporate managers to generate fresh ‘news’ indicative of perceived business ‘progress’. We highlight the growing enthusiasm of policy‐makers for a discriminatory ‘two‐tiered’ approach to public company investor relations. Accordingly, long‐term and committed investors are expected to be brought into the company's governance ‘inner circle’, while other investors are implicitly relegated to lowertier ‘outsider’ status. We argue that this supports a discriminatory approach to the allocation of voting entitlements in newly listing companies, enabling committed investors to develop cooperative and sustained governance relations with management unencumbered by ‘outside’ stock market pressures for short‐term financial‐performance outcomes.     

Taming the few: Platform regulation,independent audits,and the risks of capture created by the DMA and DSA

In its attempt to better regulate the platform economy, the European Commission recently proposed a Digital Markets Act (DMA) and a Digital Services Act (DSA). While the DMA addresses worries about digital markets not functioning properly, the DSA is concerned with societal harms stemming from the dissemination of (illegal) content on platforms. Both proposals focus on the relative size of platforms. The DMA applies to ‘gatekeeper’ platforms and the DSA has a special regime of scrutiny for ‘very large online platforms’ (VLOPs). Focusing on size, however, can have negative consequences for the enforcement of the DSA: First, risks disseminated by platforms below the VLOP-threshold reside in a regulatory blind spot. Second, VLOPs may leverage their market power against their new mandatory auditors and risk assessors, a threat theorised as ‘audit capture’ in this article. As a result, societal risks may remain undiscovered or downplayed and consumers and citizens may be harmed. This article traces the origin of the size criteria in the legislative history of the DMA and DSA proposals. It argues for safeguards against audit capture and adverse incentive structures in the DSA. The article draws on the debate on audit reform in the aftermath of the global financial crisis of 2007–2008 to provide blueprints for fixing the regulatory gap.     

Regulating Global Financial Markets

This paper discusses the role of regulation in the emergence of a global system of linked financial markets. It traces the origins of the internationalization of financial markets to the emergence of new competitive pressures, rooted in changes in the social structures of savings and investment, breaking down both national systems of financial control and international arrangements for monetary and financial co-ordination. These changes have been accompanied and facilitated by a process of international re-regulation, through informal specialist networks. Although these have facilitated the international diffusion of regulatory standards and practices, and attempted to co-ordinate them, they are greatly hampered by espousing the perspectives of the various markets and firms which it is their task to supervise. Together with their minimalist view of the aims of public legitimation and oversight of financial markets, they have proved inadequate to prevent the destabilizing effects of the new global finance on the world economy.     

The Legal and Social Construction of Value in Government Procurement Markets

The Public Services (Social Value) Act 2012 introduces a social value duty. It requires public authorities in England and Wales that are carrying out procurement activities to ‘consider’ how such activities might ‘improve … economic, social and environmental well-being’. This article analyses qualitative, empirical data on how the social value duty has been interpreted and applied across local government in England. Although only a weak legal duty, this law has made a notable impact on practice. The article explains the changes brought about in practice under the social value duty and seeks to understand why these changes have occurred. It does so by recognizing local government procurement markets, as well as local government organizations themselves, as strategic action fields. In these fields, there are competing visions for social value. It is through conversations between actors that a common meaning comes to be attached to the law.     

Harmonising national sanctioning administrative law: An alternative to a single capital‐markets supervisor

Since the disclosure in 2009 of the Larosière Report, legislative acts disciplining financial markets have established a set of rules called to form the foundations of a sanctioning administrative law to be enforced by the Member States. Furthermore, the ECtHR and the ECJ, are contributing to apply here the guarantees of the Rome Convention and the Charter of Fundamental Rights. This study, in addition to giving account of such legislation and case‐law, aims to outline the broad principles of this new law, whose purpose is levelling the ‘playing field’ amongst NCAs and fostering supervisory convergence without creating new institutions. Should this ‘experiment’ be successful, and a new way of ‘cooperative federalism’ could emerge at a global level in the Union. Otherwise, further centralisation—which is neither possible nor desirable at this stage—should be expected in future years, with a sort of single supervisory mechanism in securities markets.     

Will Listing Rule Reform Deliver Strong Public Markets for the UK?

There is a general consensus that the UK needs strong public equity markets. To help to ensure Britain is well-positioned on this front, the Financial Conduct Authority reformed the London Stock Exchange's listing regime in 2021 to foster initial public offerings (IPOs). This article outlines and evaluates these IPO-related reforms, assessing their potential to resuscitate the UK's public equity markets. The article puts the IPO-related reforms into context by considering whether the fostering of strong equity markets is a sensible policy goal and by assessing what laws governing publicly traded companies can contribute to this endeavour. The article acknowledges that the specific IPO reforms may increase IPO activity but concludes that concerns about strong public markets will continue to exist. This is because the reforms do not address stock market exits or the ‘over’-regulation of public companies which discourages reliance on equity markets.     

Criminal benefit,the confiscation order and the post-conviction confiscation regime

Governments and law enforcement agencies around the world seek to identify and confiscate the ‘proceeds of crime’ on the assertion that doing so will deter offending and symbolise to citizens and communities that ‘crime does not pay’. In the UK such assertions have underpinned the enactment of legislation, the investment in law enforcement agents and the development of wide ranging new technologies to facilitate the identification of assets and their recovery. This paper critically considers two key concepts which fundamentally drive the post-conviction confiscation regime in the UK. First, ‘criminal benefit’ which is the amount that a defendant is adjudged to have made from ‘criminal conduct’. Second, the ‘available amount’ which is the amount that the state hopes to recover from a defendant via the court ordered ‘confiscation order’. In so doing, this paper explores the assumptions at the heart of the 2002 Proceeds of Crime Act and their application in practice, concentrating on the nature of the powers accorded to financial investigators and how these powers have been interpreted and applied. It is argued that far from representing the ‘profit’ generated from crime these values are constructs founded in the relationship between legislation, the discretional practice of police officers and financial investigators, organisational restrictions and constraints and informal negotiation and compromise between the defence and prosecution. This has implications for both conceptualising the nature of the post-conviction confiscation regime as well as for shaping what the state might expect to recover from defendants.     

The FSA's ‘Treating Customers Fairly’ (TCF) Initiative: What is So Good About It and Why It May Not Work

This article examines the Financial Services Authority FSA's ‘Treating Customers Fairly’ (TCF) initiative as a case study of a regulatory strategy that aims to stimulate the self‐regulatory capacity of the regulated population to advance socially desirable goals – in this particular case, fair treatment for customers. It considers the development and nature of TCF and notes some difficulties that jeopardize its overall effectiveness. Parts one and two of the article consider the development and nature of TCF, while part three examines its appeal. Part four provides an overview of some problematic aspects of the FSA's initiative. The conclusion draws together the main threads of the analysis and considers the future of TCF and, more generally, consumer protection in the United Kingdom's system of financial regulation. The aim is to make a modest contribution to the debate about the proper direction of the present reform of financial regulation.     

Beyond financial regulation of crypto-asset wallet software: In search of secondary liability

Since Bitcoin, the blockchain space considerably evolved. One crucial piece of software to interact with blockchains and hold private-public key pairs to distinct crypto-assets and securities are wallets. Wallet software can be offered by liable third-parties (‘custodians’) who hold certain rights over assets and transactions. As parties subject to financial regulation, they are to uphold Anti-money Laundering and Combating the Financing of Terrorist (AML/CFT) standards by undertaking Know-Your-Customer (KYC) checks on users of their services.In juxtaposition, wallet software can also be issued without the involvement of a liable third-party. As no KYC is performed and users have full ‘freedom to act’, such ‘non-custodial’ wallet software is popular in criminal undertakings. They are required to interact with peer-to-peer applications and organisations running on blockchains whose benefits are not the subject of this paper. To date, financial regulation fails to adequately address such wallet software because it presumes the existence of a registered, liable entity offering said software. As illustrated in the case of Tornado Cash, financial regulation fails to trace chains of secondary liability. Alas, the considered solution is a systematic surveillance of all transactions.Against this backdrop, this paper sets forth an alternative approach rooted in copyright law. Concepts that pertain to secondary liability prove of value to develop a flexible, principles-based approach to the regulation of non-custodial wallet software that accounts for both, infringing and non-infringing uses.     

Karl Polanyi and the Problem of Corporate Social Responsibility

This article considers Corporate Social Responsibility (CSR) as part of the projects in ‘new governance and decentred regulation’, which draw social forces towards the regulation of economic behaviour. It uses Karl Polanyi to open up pertinent interfaces between society and economy for observation, and Gunther Teubner to substantiate a ‘regulatory’ view of the company's social relationships. The article finds that CSR combines movements for the recognition of social relationships, on an unprecedented scale, with rigorous simultaneous movements for market building and social abstraction. Twenty‐first‐century market economy is defined by a capacity to contain ‘the social,’ which is thrown between the two movements, creating opportunities for companies to void the market's social limits. The article counterposes that the social that ‘returns’ after marketization needs to find its way past market‐building CSR, to constructively unshackle and redefine the framing of social conflicts that concern the corporation.     

Fueling global crime: the mechanics of money laundering

Money laundering has been practiced in one form or another for thousands of years, dating back well before the birth of Christ, when highly motivated merchants moved their wealth beyond the confiscatory grasp of local rulers. Only in the recent past was the name ‘money laundering’ given to this financial hocus‐pocus. Popularly believed to have derived from Mafia ownership of Laundromats through which an endless stream of cash generated by extortion, prostitution and gambling flowed, ‘money laundering’ did not attract serious interest until the 1980s, and even then it fell primarily within a drug trafficking context. The phenomenon has pushed its way into the public consciousness as a mechanism used not only by traditional ‘underworld’ organizations, but some corporate and financial sector entities as well as individuals. Perhaps the events of 11 September 2001 did more to change the perception of money laundering as public discourse is now focused on methods used by terrorists to secure financing for their nefarious deeds. In point of fact, transnational criminality generally is exploding on a global level and money laundering is the lynchpin of their success. This article presents an overview summary of basic money laundering methods and is meant to help lay the foundation for further exploration.     

Impact of the political and economic restructuring in Eastern Europe on the availability of net energy exports—An emprirical framework

The recent political changes will not only affect the domestic economies of the Eastern European countries but also important world commodity markets. This paper investigates the consequences for world energy markets. For this purpose, a disaggregated model of the Eastern European energy markets is developed that accounts for the introduction markets (‘pricing’) into the formerly central planned economies. Deregulation will stimulate conservation and will favour ‘noble’ fuels, i.e. oil, gas and electricity. (Potential) net energy exports will slightly increase by 1995 where gas exports could compensate for the decline in oil exports.     

‘Country Rag Merchants’ and English Local Currencies in the Late Eighteenth and Early Nineteenth Century

In the late eighteenth and early nineteenth century, communities across England used country bankers’ notes almost as much as they used coins and Bank of England notes. Accounting for the relative success of these alternative currencies is challenging, however, due to the frequency of financial crisis during the period. If, during a crisis, all note holders attempted to enforce the promise to pay in gold coin against the issuing banker, the ‘law‐finance paradox’ would leave some note holders with gold coin, but would leave many more with merely ‘country rags’ or worthless pieces of paper. Building on both the credit approach to money and the relational approach to contract, this article shows note‐using communities successfully responding to financial crisis. They frequently did so by formalizing the bonds of reciprocity and trust tying the community to its note‐issuing banker – bonds sometimes made all the stronger by legal enforceability.     

The Legitimacy of New Risk Governance—A Critical View in Light of the EU's Approach to Nanotechnologies in Food

The objective of this article is to draw attention to legitimacy concerns raised by tendencies in EU risk regulation to supplement legislation with alternative regulatory options that are commonly captured under the umbrella term of ‘new governance’. To this end, the risk regulation of nanotechnologies in food serves as an empirical test case. The rise of nanotechnologies affects various societal actors and constitutes a highly controversial development due to the persistence of scientific uncertainties. To reach a compromise in the legislative process is, given the contradicting knowledge claims, a contentious and time‐consuming undertaking. This article, hence, shows that controversial decisions are not necessarily taken through the legislature—the European Parliament and the Council—but are settled, outside the political arena, in guidance documents or via non‐legislative acts. This article argues, relying on an understanding of legitimacy borrowed from Habermas and Scharpf, that despite ‘new governance’ ambitions in this direction the legitimacy of these measures is at best controversial.