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PreprintCited by 5

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New Tech v. New Deal: Fintech As A Systemic Phenomenon

Omarova, Saule T.·2019
DOI 10.2139/ssrn.3224393
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Abstract

Fintech is the hottest topic in finance today. Recent advances in cryptography, data analytics, and artificial intelligence are visibly “disrupting” traditional methods of delivering financial services and conducting financial transactions. Less visibly, fintech is also changing the way we think about finance: The rise of fintech is gradually recasting our collective understanding of the financial system as simply another sphere of normatively neutral information technology and objective computer science. By making financial transactions faster, cheaper, and more easily accessible, fintech seems to promise a micro-level “win-win” solution to the financial system’s many ills. This Article challenges such narratives and presents an alternative account of fintech as a systemic, macro-level phenomenon. Grounding the analysis of evolving fintech trends in a broader institutional context, the Article exposes the normative and political significance of the current fintech moment. It argues that the arrival of fintech enables a potentially decisive shift in the underlying public-private balance of powers, competencies, and roles in the financial system. In developing this argument, the Article makes three principal scholarly contributions. First, it introduces the concept of the New Deal settlement in finance: a fundamental political arrangement, in force for nearly a century, pursuant to which profit-seeking private actors retain control over allocating capital and generating financial risks, while the sovereign public bears responsibility for maintaining systemic financial stability. Second, the Article advances a novel conceptual framework for understanding the deep-seated financial dynamics that have eroded the New Deal settlement in recent decades. In particular, it offers a working taxonomy of principal mechanisms that both (a) enable private market actors to continuously synthesize tradable financial assets and scale up trading activities, and (b) undermine the public’s ability to manage the resulting system-wide risks. Finally, the Article shows how and why specific fintech applications – cryptocurrencies, distributed ledger technologies, digital crowdfunding, and robo-advising – are poised to amplify the effect of these destabilizing mechanisms, and thus potentially exacerbate the tensions and imbalances in today’s financial markets and the broader economy. It is this potential that renders fintech a public policy challenge of the highest order.

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Research works printed but not linked: 34

  1. of native netting and credit-extension capabilities presents a significant problem in the case of a non-permissioned, or truly distributed, ledger. Permissioned blockchain networks, such as JPMorgan's Quorum or the USC consortium's ledger, can be (and almost surely are) designed with embedded netting and credit-extension functionalities
  2. Michael J Casey & Paul, 2018, 10.1093/ww/9780199540884.013.u151514 · DOI
  3. 2018, 208 Today, crowdfunding generally refers to raising funds from a large number of individual investors, typically by using online social networks or 207 See supra Part I.A. For a recent formulation of this approach to fintech as a potentially transformative force in promoting financial inclusion, see ALL. FOR FIN. INCLUSION, FINTECH FOR FINANCIAL INCLUSION: A FRAMEWORK FOR DIGITAL FINANCIAL TRANSFORMATION, Marketplace Lending and ICOs: Synthesizing Assets Crowdfunding is a loose category covering historically varied forms of finance
  4. 2014, Although not officially known as "crowdsourcing," the practice of gathering monetary or in-kind contributions from a dispersed group of people was widely used throughout history, most notably for various charitable purposes, Origins and Development of Credit-Based Crowdfunding
  5. 2014, eBay and Napster) that led to the emergence of the current forms of online crowdfunding. See COGNIZANT, MARKETPLACE LENDING: A MATURING MARKET MEANS NEW PARTNER MODELS, The advent of the Internet enabled the rapid development of numerous peer-to-peer online transactional platforms, 2
  6. 2012, BUS. L. REV, 1, 10.1002/tie.v54.1 · DOI
  7. Andrew Verstein, 2011, The Misregulation of Person-to-Person Lending, 45 U.C. DAVIS L. REV, 445, 10.2139/ssrn.1823763 · DOI
  8. See Kevin Wack, 2014, Innovation of the Year: Online Marketplace Lending, AM. BANKER
  9. Thus, investment management giant BlackRock heavily investied in marketplace lending, while George Soros and former PIMCO CEO Mohamed El-Erian were among the high-profile individual investors
  10. LendingClub has delivered an adjusted annualized return of nearly
  11. 2014, OnDeck, a marketplace platform specializing in small business lending, reportedly issued loans at an average annual percentage rate of 54%. Kenneth A. Posner, Alternative Lenders Have a Ways to Go to Ensure "Revolution, 7% on the first $8 billion of issued loans, and issued over $1 billion in personal loans carrying interest rate above 20%. Todd Baker
  12. See Kevin Wack, 10.1111/dgd.12079 · DOI
  13. See Kevin Wack, 2015, Shakeout Is Coming, Marketplace Lenders Warn, AM. BANKER
  14. See Kevin Wack, 2015, supra note 217; Mike Cagney, How Marketplace Lenders Will Save Financial Services, AM. BANKER
  15. See Baker, supra note 218
  16. In an ICO, a firm planning to develop and produce some form of a digital product (e.g., new software) sells project-specific digital tokens that can be used as units of currency in purchaser's hands once the project launches. 225 Depending on the scheme, these tokens may be used for different purposes: some of them simply allow access to an online platform or grant participation and governance rights in a particular online network, others can be used to buy the product or service being funded, and yet others may entitle their holders to an actual portion of profits from the project in question. 226 The vast majority of ICOs to date are done using smart contracts on the Ethereum platform. 227 The key advantage of using Ethereum is that its technology allows for smooth post-ICO trading of the tokens: i.e., it enables the emergence of a secondary market in these new digital "assets, 1207. democratic means of mutual self-help, today's marketplace lending operates primarily as a means of scaling up trading volumes in institutionally-dominated wholesale markets
  17. 2018, This aptly underscores the significant potential of marketplace lending as a broad-based platform for the continuous synthesizing of high-yield assets and scaling up of secondary-market trading, AM. BANKER
  18. See supra note 33 and accompanying text
  19. Casey & See, Ethereum is designed as a common platform for hosting an infinite variety of so-called "decentralized apps" (or "Dapps") for cryptographically recording and exchanging all manner of digitized data: medical records, land titles, titles to goods, marriage certificates, copyright and other rights, contractual payments, etc. Computers verifying transactions earn ether, Ethereum's cryptocurrency, whose value accordingly increases as the network grows. Ethereum's internal programming language allows third parties to write an unlimited variety of programs, thus enabling an unlimited variety of, 79
  20. Fintech -Draft, 27, 10.1163/2210-7975_hrd-2210-0336 · DOI
  21. 230 ICOs went mainstream in 2017, which saw hundreds of offerings raise billions of dollars. 231 Notably, the most successful ICOs of the year included ventures promising to improve the existing blockchain infrastructure, to offer a "better" cryptocurrency, or to make existing crypto-assets easier to monetize. 232 To fintech enthusiasts, ICOs signal a profoundly democratic shift in market power from traditional venture capital firms to users of the relevant digital product or service. 233 Yet, it is undeniable that ICOs are often seen as purely speculative financial plays. 234 Throughout 2017, investors were ready to snap up ICO "assets," often in a matter of minutes, without much due diligence conducted in traditional securities offerings. 235 They didn't appear to worry about whether or not the tokens they were buying were related to an economically viable enterprise, or to any economic activity outside the crypto-asset space. 236 Undiscriminating investor demand for tradable tokens drove inflated ICO valuations, 229 As the popularity and use of Ethereum as the platform of choice for various crypto-projects grew, the value of ether increased correspondingly, making it a valuable financial investment, 84
  22. 2017, According to some estimates, the total amount raised in ICOs in 2017 exceeded $5.6 billion. Oscar Williams-Grut, Only 48% of ICOs Were Successful Last Year But Startups Still Managed to Raise $5.6 Billion, BUS. INSIDER
  23. Oscar Williams-Grut, 2017, The biggest ICO of 2017 was Filecoin, which raised about $257 million from sales of a token entitling its holders to blockchain-based data storage space. Id. Perhaps the most interesting case from the perspective of this Article was the SALT Lending Platform ICO, The 11 Biggest ICO Fundraises of 2017, BUS. INSIDER
  24. See Richard Waters, 2017, To Coin a Craze: Silicon Valley's Cryptocurrency Boom, FIN, TIMES
  25. Casey & See, 204 at 103-104 (citing to an ICO by Gnosis, whose platform allows users to create prediction markets for betting on anything
  26. See Waters, supra note 233
  27. Id, 2017, Even high post-ICO failure rates did not dampen this speculative demand. See Aaron Hankin, Nearly Half of All, ICOs Failed
  28. Chiu, 10.1016/s0370-2693(00)00011-3 · DOI
  29. & Baker, 2016, For an easily accessible and comprehensive account of pervasive agency problems in the mutual fund industry, see WILLIAM A. BIRDTHISTLE, EMPIRE OF THE FUND: THE WAY WE SAVE NOW, 726
  30. Deloitte See, 2015, Capitalizing on a growing opportunity, 10.1002/9781119227205.ch2 · DOI
  31. E G See, 2015, Robo-Advisers: A Closer Look
  32. For an insightful and integrated analysis of robo-advice, see Baker & Dellaert, supra note 6
  33. Melanie Fein, 2017, Are Robo-Advisors Fiduciaries? (Working Paper, 10.2139/ssrn.3028268 · DOI
  34. Fintech -Draft, 27, 10.1163/2210-7975_hrd-2210-0336 · DOI

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Metadata

Authors
Omarova, S. T.
Publisher
Elsevier BV
Published
2019
DOI
10.2139/ssrn.3224393
Cited by
5
References
0
Type
Preprint

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Omarova, S. T. (2019). New Tech v. New Deal: Fintech As A Systemic Phenomenon. https://doi.org/10.2139/ssrn.3224393

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