DRIVERLESS FINANCE

Everyone is talking about fintech, and they’re usually saying good things. Driverless Finance provides a balance to that conversation, exploring the threats that different fintech innovations pose for our financial system. With in-depth and accessible descriptions of new financial technologies and business models—ranging from distributed ledgers to machine learning, cryptoassets to robo-investing—this book helps readers to think more critically about fintech, and about how the law should respond to it.

"At long last comes the clarity, comprehensiveness and consequence policymakers crave in Driverless Finance. In this landmark book, Professor Allen describes the linkages between fintech innovation and financial stability and reminds readers that when it comes to financial stability, waiting to pull the emergency brake will be too late. Today and tomorrow's policymakers will want to buckle their seatbelts as they traverse the book’s lively and relevant account of the superhighway ahead."

Sarah Bloom Raskin

Former United States Deputy Secretary of the Treasury

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Book Contents

Prologue

The Financial Crisis Inquiry Commission of 2031 weighs in on the fintech innovations and business models that caused the financial crisis of 2030.

The Case for Precaution

Explains why policymakers should take a precautionary approach to fintech innovations. We tend to support precautionary regulation of pharmaceuticals and self-driving cars because we recognize their potential to threaten human lives, but we’re less comfortable with precautionary regulation intended to protect our financial system – but this chapter demonstrates that the costs of financial crises are not just economic, but also tear at the fabric of our society.

Fintech and Risk Management

Explains how financial risk management is likely to be transformed by the application of machine learning technology, and considers the ways in which that transformation could benefit and harm financial stability. This chapter uses three case studies: robo-investing, BlackRock’s Aladdin, and insurtech.

Fintech and Capital Intermediation

Uses the case studies of marketplace lending, high frequency trading, and cryptoassets to explore how technology is changing the ways in which our financial system intermediates capital. Increased speed and complexity can exacerbate run and fire sale dynamics, and limit the efficacy of emergency government intervention.

Fintech and Payments

Mobile payments and distributed ledgers are used as case studies to demonstrate how operational problems in the payments system can trigger and transmit financial distress. This chapter stresses the need for “macro-operational” regulation that responds to systemic interactions of operational problems. It also considers the risks associated with increased reliance on a small group of third-party technology vendors.

Fintech and Financial Stability Regulation Status Quo

Explores the inadequacies of our current financial regulatory system when it comes to fintech, including the inadequacies of new regulatory approaches like innovation hubs and regulatory sandboxes. This chapter also considers technological innovations by the regulatory agencies themselves (known as “suptech”).

Precautionary Regulation of Fintech Innovation

Recommends a variety of regulatory responses to driverless finance, ranging from licensing regimes for crypotassets and robo-investing models to suptech interventions to principles-based oversight regimes for risk management and operational technologies used internally by financial firms.

The Bigger Picture

Considers several big picture questions about the roles that finance and technology play in our society, and our expectations of government. This chapter also engages with some challenging jurisdictional issues, and the slice of the broader debates about competition, privacy, and cybersecurity that relates to financial stability.

Praise For Driverless Finance

"At long last comes the clarity, comprehensiveness and consequence policymakers crave in Driverless Finance. In this landmark book, Professor Allen describes the linkages between fintech innovation and financial stability and reminds readers that when it comes to financial stability, waiting to pull the emergency brake will be too late. Today and tomorrow's policymakers will want to buckle their seatbelts as they traverse the book’s lively and relevant account of the superhighway ahead."

Sarah Bloom Raskin

Former United States Deputy Secretary of the Treasury

"We keep on learning the hard way that paying attention to possible bad scenarios is very important. Hilary Allen articulates such a scenario for fintech’s implications for financial system stability. As well as enriching the debate, she needs to be taken seriously if she is to be proved wrong. An important book."

Paul Tucker

Research Fellow at Harvard Kennedy School; Former Deputy Governor of The Bank of England

"A must-read for those interested in understanding how fintech might undermine financial stability and lead to devastating economic losses for our society if regulators and the public aren't alert to the risks. Allen proposes a precautionary principle for balancing innovation and regulation, and whether regulators and the financial sector agree with this approach or not, they will have to grapple with her important arguments."

Michael Barr

Joan and Sanford Weill Dean of Public Policy; Frank Murphy Collegiate Professor of Public Policy; Roy F. and Jean Humphrey Proffitt Professor of Law; Faculty Director of the Center on Finance, Law & Policy

"In Driverless Finance, Professor Hilary Allen shows us the dark side of fintech innovation, both today and potentially in the future, forcefully marshalling evidence that new developments in technology pose serious systemic threats to the financial system. There are parallels to past episodes of innovation, but also unique aspects to new markets, particularly related to cryptocurrencies and crypto assets, payment systems, and potentially new sources of correlation risk. Especially provocative is her fictional 2030 report on a potential future financial crisis; we all should hope her predictions are not prophetic, but this book contains enough warnings about regulatory failures to make us worry that they might be."

Frank Partnoy

Professor of Law, UC Berkeley and author of WAIT, The Match King, Infectious Greed, and F.I.A.S.C.O.

About The Author

Hilary J. Allen is a Professor at the American University Washington College of Law, where she teaches courses in corporate law and financial regulation. She has published numerous articles on fintech and financial stability regulation in academic journals and the popular press. Prior to entering academia, Professor Allen spent seven years working in the financial services groups of prominent law firms in London, Sydney, and New York; and in 2010, she worked with the Financial Crisis Inquiry Commission appointed by Congress to study the causes of the financial crisis of 2008.