The design of current trends is emerging towards innovation, whether we are talking about financial products or any other market product.1
Defining the category of atypical financial products and other assets in this context is essential for understanding the topic at hand.
In general, atypical financial products are those financial instruments or contracts that do not fit into the traditional patterns or conventional rules of financial markets, and which can be characterised by complexity, novelty or peculiarities that differentiate them from traditional financial products.
On the other hand, the term “other assets” appears to refer to any form of securities or property held for the purpose of obtaining financial profit or benefit.
This seems a key difference because the function of some assets to become atypical financial products may be triggered somewhere in time and not at the time of their acquisition by a person.
Differences are relevant for the payment of taxes or the obligation to declare them, except for real estates where there are clear rules for real estate advertising and taxation.
The products we are discussing may include, but are not limited to: real estate, art collections, commodities, cryptocurrencies, intellectual property rights or any other object of value that can be bought, sold or traded in a financial context, a diversity that naturally denotes differences between them.
If we look closely at this phenomenon, we find in the financialisation literature a number of easily understandable descriptions of how the rise of institutional money has transformed a wide variety of (public) goods, firms and economic activities into financial assets.2
Over time, as might be expected, real estate investment strategies have become financialized, which became very visible during the credit crisis of 2007 when financial actors, strongly motivated to liquefy illiquid assets such as real estate in order to further expand the financial sphere, further integrated real estate and financial markets.
The resulting great financial crisis shifted the attention of researchers to ‘financialisation practices’, to the interconnections between financial and real estate markets, and then to what scholars have called the financialisation of urban (re)development.3
On the other hand, cryptocurrencies are increasingly differentiated from other financial products, with the term cryptocurrencies and other alternative assets/assets often used in the literature.4 Perhaps it is precisely this differentiation within the general class of atypical financial products that may be the solution to better regulation.
This is why the discussion of cryptocurrencies is useful in providing guidance to other products in the same sense. From an economic point of view, by applying different classification methods, cryptocurrencies are classified as a separate asset class, mainly due to the tail factor using the Maximum Variance Components Split method), differences that are expected to increase over time compared to other asset classes (stocks, precious metals, and currencies).5 The method presented is international, therefore, with universal formulas, it would be expected to have regulations of the same universal value.
Today, the specific definitions and classifications of atypical financial products and other assets may vary depending on the specific legislation and legal context in which they are analysed, leading to the assumption that both definitions and regulations could be uniform internationally. At least when discussing derivatives, the situation seems more uniform.
The International Monetary Fund (IMF) has issued the following definition: “A derivative is a complex type of financial collateral that is established between two or more parties. Traders use derivatives to access specific markets and trade different assets. According to the IMF, Derivatives are typically considered a form of advanced investment. The most common underlying assets for derivatives are equities, bonds, commodities, currencies, interest rates and market indices. Contract values depend on changes in the price of the underlying asset.6” The starting point for any regulatory initiative, therefore, should be that point of examining and clarifying these definitions to ensure a coherent and comprehensive understanding of the subject and to be able to assess the legal protection afforded to these types of assets.
The fact that the regulations should be international is not disputed, but only discussed is the pendulum swinging between the development of these new legal directions, either in the area of international investment law or in international financial law. In determining the nature of the law, the main actors, sources and principles of applicable law are considered. From this perspective it appears possible to construct a predictive model.
Activities related to loans, bonds, promissory notes and other forms of financial instruments, equity instruments and derivative contracts (stock lending, repo, swap, forward contracts, futures contracts, etc.) and those related to arranging, advising, issuing, underwriting, selling and buying these instruments appear to take place across borders and jurisdictions. Potential problems could arise from the inherently multi-jurisdictional nature of cross-border transactions.7
This increases the dominance of international investments of this type, a situation which activates investment treaties that have comprehensive chapters on protection standards in their content. If there are no standards for atypical or alternative financial instruments or assets, then the next step will be to draw up and amend these treaties or to draw up new types of international conventions such as the Fintech Bridges Agreements.
As we argued in an article of ours, financial technologies – if we are to follow their example – because of their tendency to digress into various economic, political, social or geographical planes, require knowledge and work in the area of public international law, by its nature and structure, sources and subjects of international law, issues of liability, jurisdiction and dispute settlement.8 For the security of financial transactions, but also in the spirit of cooperation, States have recourse to new treaties containing specific regulatory provisions on a particular subject.
With the experience of FinTech agreements, we can extrapolate the same spirit of international legal relations to alternative financial products, using the same four interlinked pillars: government to government; regulator to regulator; trade and investment and business to business. It is our belief and resulting practice that many atypical financial products and instruments can thus escape the speculative stigma.
Even the regulation of crypto-asset markets in the domestic law of each state is part of a chain of international regulations, and is closely connected with digitisation, communications and new technologies, as the latter create the operating support for the former. The use of new technologies is taking place on an international scale in areas such as healthcare, finance, banking, justice and transport.
In this context, the European Union recently adopted a new regulation on crypto markets, known as MiCA.9 In considering the role of international law in regulating these markets, the main objective is to create a broad, multilateral legal framework for issuance, trading and dealing, as well as requirements for transparency and investor protection, or specific obligations for service providers. They aim to prevent money laundering and terrorist financing through such products. MiCa has paved the way for Europe to become a global promoter and stabiliser of digital standards.10 If there were another subsequent set of legislation for specific categories of atypical products, the European Union would continue its regulatory leadership mission.
Even the definition of crypto-assets is interesting and links to new technologies. MiCA defines a crypto-asset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” This definition inspires innovation and has the potential to prompt EU and non-EU Member States that already have crypto-asset definitions in their domestic laws to modify these definitions bringing them as close as possible, if not similar to the MICA definition.11 “When MiCA comes fully into force, it will be hard to find crypto-assets that, at least at some level, will not be regulated”.12 It is to be expected, that with the advent of other regulations in this series aimed at other volatile or high-risk financial products, it will be hard to find many atypical products unregulated.
Global expansion and harmonisation will only be possible through the use of international law instruments and institutions. For example, for some types of speculative products, it is necessary to consider, inter alia, the implications of the law governing foreign law, in which case we can generate another debate on private international law, debates that we will certainly find in future research.13 Foreign investors can access and invest in these types of products and assets from different countries and regions, leading to greater interconnection between international financial markets. As a result, investors enjoy additional options to diversify their investment portfolio, whether we are talking about investing in derivatives, digital assets or other non-traditional assets.
If we put international investment at the centre of the analysis, international regulations and standards are decisive in protecting investors and ensuring a fair and transparent financial environment. When the contract has problems, it is good to have bilateral or multilateral treaty coverage. Atypical financial products and other assets are often subject to international regulations and standards, such as those set by organisations like the Organisation for Economic Cooperation and Development (OECD), the Financial Action Task Force (FATF) or the International Organisation of Securities Commissioners (IOSCO). The aim is to reduce risks that can adversely affect international regulation and supervision.
In terms of the direct link to international investment, we are currently seeing how International Investment Agreements are not at all equipped with provisions adapted to the digital age or the age of alternative financial products. The current attempts of states are around international conventions as specific as possible, such as the FinTech Bridges Agreements. But in all this process, the priority or focus is on the legal relationship of international investment law, and only secondarily should the auxiliary role of foreign policy be felt. The European Union needs an economy with a solid chance of progress, especially at a time when theorists are calculating increasingly unfavourable prognoses.14
In a 2022 paper we proposed amending investment agreements by including a special clause on better protection of human rights, for example, from this perspective.15 Following the same line of thinking, it becomes possible to include in investment treaties other clauses related to investments in various atypical financial products.
In looking for an analysis of court decisions and the evolution of case law in this area, we can take the example of the SEC v. Telegram decision when, in 2020, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Telegram, an instant messaging platform, for illegally issuing a token called «Gram». The SEC claimed that Gram was a valuable security and that its issuance did not comply with securities regulations. The court agreed with the SEC and issued an injunction against the distribution of the Gram token. This decision had a significant impact on the cryptocurrency and blockchain-based financial products industry.
In recent decades, there have been numerous decisions and developments in case law related to speculative financial products such as derivatives and margin trading. Courts and regulators have examined and interpreted various issues related to these products, such as transparency, fair disclosure to investors and limits on the risk taken by financial intermediaries. Analysis of these decisions and developments shows how legal protection has adapted and evolved in the face of the complexity of atypical financial products and other assets.
An indication of the intense cooperation is that crypto regulation obviously follows, including at European level, digital regulation. The Digital Operational Resilience Act (DORA) has a very broad application and covers credit institutions, payment institutions, e-money institutions, investment firms, crypto-asset service providers, central securities depositories, CCPs, trading venues, trade repositories, AIFMs, management companies, data reporting service providers, insurance and reinsurance companies, insurance and reinsurance intermediaries, occupational pension institutions, credit rating agencies, audit and statutory audit firms, critical asset managers, crowdfunding service providers, security depositories and third-party ICT service providers. At the end of 2022, the Digital Operational Resilience Regulatory Act (DORA) was published in the Official Journal of the European Union, coming into force on 16 January 2023. The complexity of the effects of the DORA on the area of cyber security for organisations in the financial sector is comparable to what the GDPR has meant for the area of personal data protection. The DORA creates the first legislative framework that harmonises cybersecurity and risk measures for all entities in the financial sector, not just banks, at European level.
From the exposition of the above links, this study is particularly useful for all those interested in alternative financial products, as they can see that the national regulatory process, waits and follows the international one. By looking for sources of international law, we can assess whether or not a particular jurisdiction has a corpus harmonised with global trends or if it does not, we have a case where investors will automatically expect natural regulatory changes.
Our article suggests some future prospects for regulatory research and practice, the goal of which is uniformity. At the same time, regulation can bring an opportunity for growth for non-EU operators wishing to offer services in Europe, if they are able to comply with the standards.16
In terms of future prospects for research and practice in the field, the following topics could be of interest: very clear regulatory differentiations between the use of goods for their own sake and for commercial purposes; analysis of the impact of international regulations globally and their evolution over time; research into international cooperation mechanisms and common standards; and analysis of the impact of new technologies such as DeFi and NFT and the need to update existing regulations, as we are currently in quicksand at the level of national law. These topics could be of interest to researchers, policy makers and operators in the atypical financial products industry alike, towards a better understanding of the regulation of specific markets and how all these can be used to promote sustainable growth and confidence in this emerging industry. Future regulatory proposals may be varied and dependent in their relationship to developments in the financial sector and the priorities of regulators. In all the work in progress, there should be a particular focus on strengthening transparency and information for investors, improving supervision and risk assessment, as well as updating legislation and adapting to innovation and developments in society at large. n
