Fear of fintech

Fear of fintech

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The fintech revolution has created an environment ripe for instability and disruption and could contain the seeds of the next financial crisis, warns Willian Magnuson, associate professor of law at Texas A&M University.

He believes fintech outfits, typically small start-ups, are clearly more vulnerable to rapid, adverse shocks than regular Wall Street banks. He points to Mt Gox, the world’s biggest bitcoin exchange until an apparent security breach took it down in 2014, leading to losses that would total more than $3.5 billion in today’s prices.

Also, fintech companies are more difficult to keep an eye as their reliance on complex computer algorithms makes it harder for outsiders to get a clear picture of the risks and rewards. “The recent proliferation of ‘initial coin offerings’, for example, has left regulators around the world scrambling to figure out how to respond,” writes Magnuson.

He adds that the fintech sector has not yet developed the kind of unwritten norms and expectations that guide more traditional financial institutions. And that might not happen anytime soon.

“The industry is so new, and the players so diverse, that companies have little incentive to cooperate for the greater good,” he says. “Instead, they prioritise aggressive growth and reckless behaviour.”

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