A set of computational rules to be followed in calculations and in other problem solving, which is also used to refer to the process to be followed, especially by a computer.
Trading in financial instruments where a computer algorithm determines the individual parameters of orders (such as whether to initiate the order, the timing, price or quality of the order and how to manage the order after its submission) and where there is limited or no human intervention.
Artificial intelligence (AI)
Information technology systems that perform functions and tasks normally requiring human intelligence. Examples of use include speech recognition/natural language processingand machine learning.
Also known as Robo-advice. Fully or partly automated online services and other models that use technology to deliver low cost advice to mass market consumers. The underlying advice models have the potential to be more scalable than face-to-face advice propositions and are regulated in the same way. Automated advice models in the UK currently fall into three categories:
• Fully automated.
• Hybrid (that is, involving human interaction in the process).
• Technological tools that make the face-to-face advice process more efficient.
The use of digital tools and information systems (such as powerful processors, software and algorithms) to generate, collect, store and process high volumes of different types of data at high velocity from different types of sources, often in real time. The FCA describes Big Data by reference to three “Vs”:
• Volume. The large and fast-growing amount of data, especially driven by new forms of mass data (such as the “internet of things”, sensors, social media, and financial markets data).
• Variety. The variety of data that result from the combination of different datasets and sources, which could be structured, unstructured or semi-structured (that is, a hybrid kind of data that is organised in a structure, but does not follow a specific, pre-defined model of structuring).
• Velocity. The quick generation of data as well as the speed in data processing and the final data evaluation.
A means of users to store and access data and programs over the internet, instead of their computer’s hard drive. This means that users can access their information on any device with an internet connection.
Cloud computing is becoming the norm for many organisations for the delivery of IT services. The use of the Cloud has also made possible the analysis of large data sets (Big Data) and the development of specific FinTech applications.
A means for individuals and businesses to raise money from the public to support a business, project, campaign or individual, usually through online platforms. The business or individual seeking financing explains the project being financed in a pitch to attract loans and investment from as many parties as possible. The FCA identifies four types of crowdfunding:
• Loan-based crowdfunding. People lend money in return for interest payments and repayment of capital over time. This is also known as peer-to-peer lending. Some business-to-business loans are excluded from the FCA’s definition.
• Investment-based crowdfunding. People invest either directly in new or established business by buying shares or debt securities, or indirectly by buying units in an investment scheme.
• Donation-based crowdfunding. People give money to individuals, enterprises or organisations whose causes, activities or purchases they want to support.
• Pre-payment/Rewards-based crowdfunding. People give money in return for a reward, service or product.
Currently, only loan-based crowdfunding and investment-based crowdfunding are regulated by the FCA in the UK
A broad term used by regulators and governments to refer to a cryptographically secured digital representation of value or contractual rights that is powered by forms of distributed ledger technology and can be stored, transferred or traded electronically. They comprise a range of different forms, referred to by UK regulators as tokens.
The term is also used more generally to distinguish digital currency and assets from fiat currency.
A type of digital currency that uses cryptographic encryption to validate and secure transactions. Major cryptocurrencies include Bitcoin (the first decentralised cryptocurrency), Ethereum, Litecoin.
Also known as virtual currency. A digital representation (that is, it only exists electronically) of value that functions as a medium of exchange, a unit of account and a store of value. They are not issued or backed by government or other public authority (unlike fiat currency). They are issued and usually controlled by their developers, and are used and accepted among the members of a specific virtual community. They are an accepted means of payment that can be transferred, stored or traded electronically. Digital currencies include credits for computer games used as a medium of exchange within the computer games where these are issued, as well as e-money and cryptocurrency.
Although initially designed to be used to make payments, many are now held as speculative assets by investors who hope their value will rise.
Novel and more radical innovations in technology that aim to disrupt established financial services markets and the business models of entities operating in these markets, or establish new markets for financial products and services. The opposite of non-disruptive FinTech.
Distributed ledger technology (DLT)
Any publicly available electronic medium of exchange that features a permissionless distributed ledger (that is, a shared database where all participants can read everything, but no single user controls the ability to write) and a decentralised system for exchanging value.
Information is saved on a decentralised, distributed database (ledger) that is available in multiple copies on multiple locations that are constantly synchronised and available to all members of the network supporting the ledger. Blockchain is one type of distributed ledger that organises data into blocks that are chained together in an append only mode.
All cryptoassets utilise various forms of DLT (be it blockchain or otherwise). Although the use cases of DLT extend beyond financial services, it has the potential to be employed for a variety of other purposes in the financial services sector. These include:
• Securities settlement: DLT might be used to increase the speed of settlement, reduce back-office costs and provide greater transparency of transactions and holdings.
• Payment systems: DLT allows payment systems to operate in a fully decentralised way, without the traditional counterparties.
• Anti-money laundering and know-your-customer.
• Smart contract.
• Trading in debt, equity and derivatives.
Also known as fiat money. Money that a government has issued and declared to be legal tender, but which is not backed by a physical commodity such as gold (which means that its value is not derived from the material from which it is made).
An abbreviation of financial technology. An umbrella term describing technology-enabled innovation in financial services, regardless of the nature or size of the entity providing the services. This kind of innovation allows companies in the FinTech sector to compete with traditional financial institutions in providing financial services, products and solutions to customers.
Initial coin offering (ICO)
Also known as a token sale or a coin sale (see Tokens). A digital way of raising finance online from the public using digital currency and distributed ledger technology. The issuer issues a proprietary digital coin or token against payment in a cryptocurrency, like Bitcoin or Ether. The digital coin or token issued is related to a specific firm or project. It may represent a share in a firm, a pre-payment voucher for future services or have no discernible value at all. ICOs vary widely in design and types and are often projects that are in a very early stage of development.
The use of innovation and technologies specific to the insurance sector to improve the efficiency and effectiveness of traditional insurance processes and models across the industry through the life cycle of the product (from development to modelling, underwriting, and to claims and administration processes).
The ability of computers to learn without being explicitly programmed, instead learning patterns from experience, for example by recognising patterns from many examples.
Natural language processing
An interdisciplinary field of computer science, artificial intelligence (AI), and computation linguistics that focuses on programming computers and algorithms to analyse, process, and understand human language.
FinTech products or services that trigger incremental innovation and increase efficiency in established and often mature sectors of the financial services industry. The opposite of disruptive FinTech.
The adoption and use of technology by regulated financial services firms and other market participants to help them to follow and meet regulatory and compliance requirements (including reporting) more efficiently or effectively than established legacy systems.
A controlled, supervised space within which both authorised and unauthorised financial firms can test innovative products, services, business models and delivery mechanisms in the real market, with real consumers, with the support of a regulatory authority for a limited time. It offers tools such as restricted authorisation, individual guidance, waivers and no-enforcement-action letters. The FCA’s regulatory sandbox is aimed at providing firms with:
• Reduced time-to-market at potentially lower cost.
• Appropriate consumer protection safeguards built in to new products and services.
• Better access to finance.
The FCA was the first to introduce a regulatory sandbox, although the concept has been adopted globally, by numerous overseas regulators.
Information technology applications that underpin automated advice models. Robo-advisors combine digital interfaces and algorithm, including machine learning models, to provide a range of financial services advice. This may include automated financial recommendations, contract brokering and portfolio management. Robo-advisors can be standalone firms and platforms or in-house applications run by incumbent financial institutions.
A self-executing contract (created using blockchain or other distributed ledger technology) where the terms of the agreement between the parties are written into code that exists across a distributed, decentralised blockchain network. The terms of the contract are then executed on the occurrence of specified events in the contract, which can trigger financial flows or changes of ownership, without the need for further action by the parties.
The use of technologically enabled innovation by regulatory authorities in their role as supervisor of financial services firms.
The term used by the FCA and HM Treasury to denote different forms of cryptoassets. These are categorised into three types:
• Exchange or Payment tokens. Tokens that are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. Usually, a decentralised tool for buying and selling goods and services without traditional intermediaries.
• Security tokens: Tokens with specific characteristics that mean they meet the definition of a “specified Investment” in the UK like a share or a debt instrument as set out in the RAO.
• Utility tokens. Tokens that grant holders access to a current or prospective product or service, but do not grant holders rights that are the same as those granted by specified investments. Although utility tokens are not specified investments, they might meet the definition of e-money in certain circumstances (as could other tokens).
Also known as digital wallet. A virtual currency account (equivalent to a bank or payment institution offering a payment account) from which payment in virtual currencies can be made or received to and from other wallets.
Virtual currency exchange platform
Providers engaged primarily and professionally in exchange services between digital currency and fiat currency.
(c) Practical Law