Deloitte has just released “Fintech by the numbers”, the first of a series of three reports examining the history and prospects of Fintech.  The subsequent parts will explore the perspectives of incumbent financial institutions, of Fintech incubators, and of Fintech companies.

As for this first report, it concludes that Fintech development has reached what I might call Stage 3.

Let’s take the stages one by one.

Though ‘Fintechs’ in marketplace lending and payments have been around for 15-20 years, the report says that it is only since early 2015 that the term ‘Fintech’ has taken off. So Stage 1 might be considered the period up to 2015.  In that stage, financial industry executives either ignored Fintechs entirely or were worried by the threat posed by Fintech companies since they are more nimble and less constrained by regulation.  The feeling was that Fintech companies were “disruptive competitors that could overturn the industry’s existing business models and grab significant market share, perhaps even driving some well-known players into irrelevance”.

However, we are now fully in the middle of Stage 2, in which “many traditional financial services companies (have) dramatically ramped up their own investments and transformation initiatives”.  In other words, Stage 2 has large financial institutions, Fintechs and investors teaming up in pursuit of new markets, products, customers, profits.

So what is Stage 3?  Well, Deloitte’s examination of the figures leads it to suggest that Fintech “has entered a stage of shakeout and consolidation”.  I discuss the implications of such consolidation right at the end of this piece.

Let me start by observing that though the report mentions regulatory changes, the implication is that these will all benefit the industry – which may or may not turn out to be the case.  For example, the report does not mention the Fintech-related bans in some countries, not the court cases in others.

Neither does the report take seriously the hacking of Fintech and Fintech-related companies.  If Mark Hughes, the President of Security at BT is to be believed, the whole world of AI is now a war, or an arms race, between the ‘good guys’ and the ‘bad guys’ – and there is a horrifying chance that the ‘bad guys’ might win (see

So, as often with consultancy companies, this “report” is something of a puff, focusing as it does entirely on the positive in order to attract potential customers.

However, even puff pieces have their uses.

Its findings can be summed up as, the following, only the first of which will be anything of a surprise to anyone at all aware of the industry:

–        New company formations are in decline over the past two years.

–        Funding in many categories is still on the rise, especially in certain banking and commercial real estate categories.

–        New and much larger sources of funding are emerging.

–        Fintech acquisitions and initial public offerings (IPOs) are ramping up.

–        There continues to be “meaningful regional variability” in Fintech creation and investor interest.

On the last point, the report observes that the USA and the UK are among the most Fintech-friendly countries, and that the US far outstrips any other country in terms of the total number of Fintechs in operation as well as total investments, particularly in deposits and lending, payments, financial management, and investment management.

However, the US seems to be on a divergent path from another great investor in Fintech – China. The US world of Fintech is made up of thousands of companies, large and small (e.g. 264 fintech companies have raised $7.71 billion in funding); but, in China, the focus is on a few large companies such as Tencent and Ping An (e.g. 7 fintech companies have raised $6.92 billion).

In the payments sector, India has been a favourable market for startups, with a few companies but large investments.

On the other hand, in the commercial insurance sector, while the US does have the largest number of Fintech companies, it is Bermuda where the most investment dollars have been allocated, driven by the large and influential reinsurance business in Bermuda.

Overall, the current position is that Fintechs have driven technology innovation, resulting in operational efficiencies, new product development, and changing customer expectations; however, Fintechs “have not meaningfully disintermediated existing providers”, nor does it look likely that they will overturn “longstanding financial services infrastructures, such as exchanges or payment networks”.

And what are the implications for the future?

For Fintechs: investors have heightened expectations as companies move from “startup to scale-up.” That means engaging with these investors in new ways that may be beyond the current comfort zone of most Fintech companies.  Fintechs also need to consider: how will their company valuations change in a climate of consolidation as distinct from expansion? How will they need to be governed and how comply with regulations and rapid regulatory changes?  Most important: how will Fintechs be regarded in terms of leadership, reputation, culture, and values?

For large incumbents, whether seeking to partner with Fintechs or acquire them, the key issue is that of ramping up their abilities to manage working relationships with new companies while being agile enough to adjust to rapid shifts in the business landscape from additional potential disruptions and new tech developments and solutions.  Current evidence indicates to Deloitte that “many incumbents are challenged to execute pilot programs and proofs of concept. These difficulties could stem from, among other things, a lack of technical skills and resources, as well as access to relevant fintechs that may have applicable capabilities”.

For other companies, government bodies, and NGOs: in addition to the considerations mentioned above, in such a rapidly changing and highly volatile landscape, how do you identify the right Fintech partners with which to engage?

It isn’t long since my last blog was posted, and my attention is already drawn to a very active and first-rate leader in the FinTech industry who writes to the effect that open sourcing will give us far better knowledge about how historically closed structures operate (who’s involved, what they are doing, why, and so on).

He goes on to say that digitalisation “not only creates a record of activity but, if it is combined with distributed ledger technology, a record of truth. Every action can be recorded on the ledger, with immutability.”

Further, that interoperation through APIs (Application Programming Interfaces) “means that everyone can have access. Everyone can build smarter, better, more intelligent apps and services by combining the best of the world’s code with their code. This will make the world a better place, as companies will keep developing iterations of services, each one leveraging a new API that improves the customer experience”.


That’s several arguments, so let’s take them one by one.

First, will open sourcing will give us far better knowledge about how historically closed structures operate (who’s involved, what they are doing, why, and so on)?  Possibly, yes. But not necessarily. Because open sourcing doesn’t prevent anyone from using open-sourced code to do business in private.  There are, for example, several Linux-based companies, and it is difficult to demonstrate that the internal goings-on of these companies are more public than those in companies which do not use open source code.

So how about his statement that digitalisation “not only creates a record of activity but, if it is combined with distributed ledger technology, a record of truth. Every action can be recorded on the ledger, with immutability.”  Well, the immutability bit is nearly 100% true (all codes and systems can and will be cracked sometime… but “the record of truth” bit is true for the present).  Though that doesn’t mean that the immutable record has necessarily to be open to the public. The immutable record could remain visible only to as few as three individuals.  In practice, at present, it is usually visible to many more, but that need not be the case; “private distributed ledgers” can exist as well as “public distributed ledgers”.

OK, so how about the statement: interoperation through APIs (Application Programming Interfaces) “means that everyone can have access”?  Hmm, as with everything else in the tech world, that depends entirely on whether the specific API *allows* everyone access, or only some people.

Ah, but is it not true that “everyone can build smarter, better, more intelligent apps and services by combining the best of the world’s code with their code”. Well, let’s say that – yes, it is. However, that doesn’t mean that the world will necessarily be “a better place”.

Why not, if “companies keep developing iterations of services, each one leveraging a new API that improves the customer experience”? Because improved customer experience doesn’t mean the world is a better place, it only means that the world is a better place for customers.  It might be a worse place for non-customers, and there might be more non-consumers than consumers.

How about if everyone in the world could be a customer? Then of course it would mean better customer experience for that many more people.  But would even that mean that the world, as a whole, would be better?

To answer that, let’s imagine that the whole world could join a new gold rush in California tomorrow. Unlike the California Gold Rush in the 1840s, which brought brought in merely some 300,000 people, let us say that our 2017 gold rush brings in 300 million people.  Let’s also imagine that picks and shovels and other equipment needed for the gold mining are now “open sourced”.  Naturally, each iteration of the equipment will indeed be better than the last, and this will undoubtedly lead to great customer satisfaction on the part of the 300 million people involved in the new gold rush.

But who would be making more money than the miners?  Those who were manufacturing the equipment that was being sold repeatedly to the 300 million miners.

In the tech world, as in every other world, some people are more equal than others.

Those who are after good experience as customers might want to give some fleeting thought to the quality of the experience of those who’re making money from the selling 🙂

Much better to be a shareholder than a customer.

Ha, you say, what about “prosumers”?  That’s another story.  We’ll come to that another time.

Meanwhile, remember: it is better for you to be a shareholder in the equipment company than a customer of the equipment company.

“Unless I strike gold!”, you say.


So: best of luck. Your world might indeed be better then.

But if you want technology to contribute to a more open and democratic world, we’ll all need to be much more active in politics, in citizen groups, in civil society – not only to make sure that the right policies and the right regulation exist, but also that they are applied.

Among tech geeks, it is an established mantra that technology will lead inevitably to democratisation: “Technology provides access and it helps establish and communicate the truth, so everything from banks to governments, and from charities to businesses, will be more transparent than they’ve ever been”.

You will notice that the media is missing from that list (banks, businesses, charities, governments).

If media had been included, the falsity of that statement would have become immediately apparent: the rise of technology-driven social media has paralleled the rise of fake news.

In fact, research indicates that the more we are into tech, the more likely we are to brainwash ourselves by selectivity in what we access, actively or unconsciously shutting out sources and messages we don’t like – or those that we find challenge our prejudices.

Consider too that, according to EY’s FinTech Adoption Index, the country which far and away out-adopts FinTech than any other country is one of the least democratic countries in the world: China (at 69% of the digitally-active population).

Oh, and in the country which has the second-fastest rate of FinTech adoption (my own country, India – at 52%), the rate of adoption precisely parallels the rate at which the country is being “Undemocratised” by Prime Minister Modi.


You could counter-argue that the rate of adoption may be highest in non-democratic countries because the population is taking to FinTech in order to oppose De-democratisation, or perhaps in the hope of democratisation.

In fact, as you and I know, most people don’t even begin to think of the social (let alone the political!) consequences of the technologies they patronise: we take to particular technologies because of the immediate benefits they seem to offer us, regardless of whatever longer-term social or political consequences those may entail.

Further, there is the fact that technologies can also be used to enslave or to keep people docile at their current level of society or politics.

So all technologies have both positive and negative potential.

“Ah”, you may respond, “Of course, I now recollect what we were taught in school: science and technology are neither good nor bad”.

Well, if that’s what they taught at school, they didn’t teach the whole truth.

The whole truth is that science and technology are indeed neither good nor bad; rather, they are amplifiers.

In other words, science and technology amplify our ability to do good as well as our ability to do evil.  In primitive times, we could each kill a few people who were within reach of a sword or bow-and-arrow; now we can, at the mere press of a button, kill not only a few hundreds or thousands but even millions of people who are tens of thousands of miles away.

In fact, given solar power, Lethal Autonomous Weapons Systems could continue randomly looking for and killing selected pre-identified types of individuals indefinitely – say, everyone with a beard more than a few millimetres long.

In other words, technology merely amplifies our choices, it doesn’t make those choices for us.

With every improvement or leap in technological power, we humans will have to be all the more vigilant, and to work all the harder, against erosion of democratic rights and, equally important, against abandonment of democratic responsibilities by citizens.

That is, if democracy is even to survive.

Smart Contracts are one of the three aspects of FinTech that have drawn most attention; the others are: digital currencies (Bitcoin, Ether, et. al.), and distributed ledgers (Block-chain, Ethereum, et. al.).

When did the term “smart contract” originate?  Apparently, in the mid-1990’s.  Who first used the term?  Apparently, Nick Szabo, a computer scientist and cryptographer. Here is his definition of a smart contract: “A computerized transaction protocol that executes the terms of a contract”.  That suggests something pretty basic, and the capabilities of Smart Contracts are pretty basic at present.

A fuller but still pretty simple and good explanation of Smart Contracts is available at:

The only problem with this, and with most other discussions, of Smart Contracts is that they are led by those who have a vested interest in popularising them.

As a result, they minimise, instead of acknowledging, the challenges entailed by Smart Contracts.  For example, in the short history of Blockchain we have already seen a lot of “accidents”.  By contrast, there is a seamless series of General Ledger entries with banks since the Middle Ages. This chain (although privately managed) has proven very reliable.  In banks, cheating and fraud may well have taken place in this or that way, however I cannot recollect any such incident in relation to ledger entries (have you experienced any fraud caused by your bank regarding your bank account? Or do you perhaps know anyone who has experienced cheating in relation to ledger entries regarding their account?).  In other words, Blockchain – so far as reliability is concerned – claims to solve a non-existing problem. Moreover, it is not clear whether the Blockchain solution regarding reliability is in fact less good than what we have already.

Here are some further difficulties:

1. Failure risk due to power failure (common in certain countries, and not unknown in others)

2. Failure risk due to hacking (theoretically impossible, but in practice not so; think Mount Gex, think DAO, think CoinDash, think Bithumb, think Bitcoin Savings & Trust, think Bitcoinica, think BitFloor, think BIPS, think Picostocks – should I really go on?)

3. Failure risk due to technical issues – e.g. in the programming (whether deliberate or accidental).

4. Legal risk: in the absence of a legal framework around Smart Contracts, it is uncertain who is liable for what if there is a failure of any sort.  Related to this is the central issue of the absence of a Smart Contract Standard, on which depends entirely the possibility of real-time analytics – and, indeed, the possibility of reducing the regulatory burden without resulting chaos, fraud or exploitation.  In order to understand this, please read the article, “From Digital Currencies to Digital Finance” by Brammertz & Mendelowitz (Dr. Willi Brammertz is Chairman of the ACTUS User Association, and Dr. Allan Mendelowitz is CEO of ACTUS) which is to be published in Vol. 19, Issue 1 of the Journal of Risk Finance.

5. Oligopoly Risk: at present, Smart Contracts are being sold to the public on the basis of savings “Smart contracts save you money by taking out the middleman”. It is true is that existing middlemen and middlewomen will be taken out by Smart Contracts. But it is not quite true that there will be no middlemen/ women any longer. The new middlemen/ women will be the owners of the technologies that make Smart Contracts possible – that is, the owners of the tech infrastructures involved. Here are the basic infrastructures involved: the energy system, the IT system, the Blockchain, the Blockchain Platform (e.g. Etherium or whatever else), and the payment medium (which could be Bitcoins or, in future, US Dollars or whatever). The important points about all this are the following:

A.  Capitalism encourages fizz at the start of any new technology but, later, encourages consolidation. Think of the number of car manufacturers at the start of the motor car industry compared to the number of such manufacturers now. In other words, Capitalism always tends to drive towards monopoly but, for various human, social and political reasons, is stopped short of that, resulting in oligopoly.

B.  All oligopolies tend to want to increase their profits, so that what appears free or cheap in the fizz phase, or even in the consolidation phase, tends to become more and more expensive when the industry is run by an oligopoly  – and that continues to be the case till incumbents are challenged by the rise of newer technologies and related new business models.

So what does all this mean for you?

Should you be a party to a Smart Contract?  Well, not till at least the legal issues are sufficiently sorted – unless you are simply experimenting with models to learn from them (and even then, I would be careful).

Should you invest in technologies associated with Smart Contracts?  Yes, to the extent that you have money that you are prepared to lose, considering that the most profitable phase in which to invest in any industry is the fizz phase – though that is also the riskiest phase.  As winners emerge, and the industry begins to consolidate, it becomes less and less risky, but it also becomes less and less likely to be dramatically profitable.

The golden rules remain: do not invest if you are not prepared to lose all the money you have invested *and* do not invest if you don’t understand the industry as a whole as well as the specific company and the related business opportunity involved.


A friend writes that “FinTech is about enabling greater customer-centricity, while digital currencies are about faster and near-free exchange globally”.

In that sentence, one claim is made about FinTech, while two claims are made about digital currencies.

These claims are simultaneously true and not true.

Let’s take the first claim, about FinTech. Customer-centricity is certainly touted as a key reason for adopting Fintech.  However, in my experience, as customer-centricity can’t be measured, actual business cases for the adoption of Fintech rest on its potentially enabling economy, speed and reach.  In that sense, it is not true that Fintech is about customer-centricity.  In fact, the experience with Fintech so far is that it may even impede customer-centricity, in the same way as most customers don’t like automated voices when they ring in to any office.  It is far more customer-centric to provide human receptionists.

So let’s take the two claims about digital currencies.  One claim is that digital currencies are going to be “faster”.  Well, faster than what?  Presumably, faster than Dollars, Pounds, Euros, etc.

Let’s think about that a moment.  Are Bitcoins (or any other digital currency) really going to be transmitted faster than dollars, pounds or Euros across whatever means of transmission exist in say a year’s time (or ten or a hundred)?

Extremely doubtful, since the transmission of any two digital objects of the same digital size has little relevance to the speed of their transmission – and Dollars, Pounds and Euros have already become primarily digital themselves.

The next claim is that digital currencies will provide near-free exchange globally.  Hmm.  So far, advances in technology have certainly make it possible for digital objects to be moved more and more cheaply.  It is possible that further technological advances will continue to make it still cheaper to transport digital objects and information.  However, I doubt that digital currencies (whether of the Bitcoin variety or of the Dollars and Pounds variety) will ever be “nearly free”: legislative mechanisms always need to be paid for, regulatory arrangements need to be paid for, the cost of generating Bitcoin or any other electronic currency will not be markedly different from the cost of generating electronic Dollars or whatever, and the cost of transmission will depend on the cost of energy as well as the cost of the hard and soft infrastructure involved.

Lastly, we already have experience of things that cost nearly nothing to produce, but we have found that that is not usually in our world good reason to let people have those things for nothing.  Consider water, which is freely given by God, but everything involved in getting water from wherever it is to my location and indeed to my lips costs money. Further, everyone involved in the supply chain needs to be paid something – and usually wants to be paid as much as possible.  If all that is not organised nationally through the taxation system, it will be organised at greater cost to citizens (if for no other reason, than for reasons of economies of scale) by individuals, groups or corporations.

So the reason to use Blockchain and Blockchain-related products (whether FinTech in general or Digital Currencies in particular) is simply, solely and exclusively:  security.  Other reasons are piffle.

Oh and I should say that Blockchain-related products are not yet as secure as they need to be.

Regulators have historically focused on preventing the risks associated with “too big to fail” institutions.  As a result, they are tending to overlook or mishandle the conceptually distinct risks associated with multiple smaller-scale decentralized financial markets. The reality is that, in many ways, these risks can be greater than those presented by large institutions.  Decentralized fintech markets suffer from “the Systemic Risk of Decentralization”, are more vulnerable to adverse economic shocks, are less transparent to regulators, and are more likely to encourage excessively risky behavior because of the possibility of evading effectual monitoring; in any case, the technology “disincentivises cooperation” with regulatory authorities. That, in brief, is the argument of a paper titled “Regulating Fintech” by William J. Magnuson, Associate Professor at Texas A & M University School of Law, being published in its Legal Studies Research Paper Series as Research Paper No. 17–55 (

The Paper concludes by sketching regulatory responses that “may better correspond to the particular risks and rewards entailed by fintech”. 

Magnuson has four suggestions:

“First, regulators should adopt a “regulation lite” model that incentivizes fintech firms to provide information to regulators about their businesses and seek guidance on the applicability of current law.

Second, regulators should focus on limiting contagion in the event of unexpected economic shocks.

Third, regulators should attempt to leverage the idiosyncratic knowledge of fintech firms to encourage self-policing.

Finally, regulators should work closely with their counterparts in foreign countries to design regulations that work on the global level.”

Well, what are we to make of all this? 

The analysis is certainly perceptive and persuasive.

Moreover, the suggestions are apt.  However, I get worried, and most knowledgeable people get worried, whenever words such as “should” and “ought” start being used too often.  Because what matters is what happens after the “shoulds” and “oughts” have been agreed: there is the far more difficult discussion which remains, regarding *how* the “shoulds” are to be achieved.

On his first point, Magnuson thinks that better quality information can be produced by promoting “observed experimentation”. In other words, “regulators should create incentives for fintech firms to provide information about their business and voluntarily seek guidance on the applicability of current regulations”. If that makes you think of “regulatory sandboxes” as are now adopted by the UK and other countries, your thought is bang on target: sandboxes allow fintech startups to launch new financial products on an accelerated basis; he adds “and with minimal regulatory barriers” though there cannot be reduction in the “regulatory barriers” as there are none in most of these countries, at present. “The advantages” writes Magnuson” of (the sandbox) approach are clear, as it promotes greater transparency in the industry while simultaneously encouraging innovation”.  Yes, but what of the disadvantages?  Some firms are co-operating.  Others are not.  Those that co-operate take on the financial, managerial and time-related burden of doing so.  Those that do not co-operate are free of the financial, managerial and time-related burden.  This provides an advantage to those competitors who choose to avoid playing in the sandboxes.  In other words, sandboxes tilt the playing field against precisely those who choose to play in the sandboxes.  The second disadvantage is that, even when a company is playing in the sandbox, it is difficult to tell whether it is sharing “the truth, the whole truth and nothing but the truth”.  In fact, most companies would be foolish to share anything like the whole truth because that would simply betray their competitive advantages to rivals, particularly those who choose not to be burdened by the financial, managerial and time-related disadvantages of playing in the sandbox.  

While Magnuson acknowledges sandboxes as “one example” of what he considers an appropriate approach, he confines himself to merely mentioning other “ideas that have been floated” including “the centralization of regulatory authority, the creation of targeted fintech regulation, and simplified registration procedures”.  He does not discuss these, presumably because he is biased against them.  My own bias is, I hope, clear: voluntarism is fine for those who willingly accept the burdens that voluntarism imposes; and voluntarism is certainly fine for a short experimental period; however, there is no alternative to regulation that imposes an equal but minimal regulatory burden on all firms in a sector.

In any case, increased flow of good-quality information is not a panacea, as Magnuson agrees: “Merely increasing public disclosure regarding the risks of fintech will not address the fundamental sources of those risks themselves. A growing number of studies demonstrate the limitations of disclosure as a method for reducing systemic risk. Individuals are often unable to process the significant amounts of information available to them, and even when they are, they often fail to change their behaviors in order to reflect this information. Thus, additional disclosure will likely be insufficient to address the systemic risk concerns (regarding) fintech”. 

That is why Magnuson asserts that “fintech regulation must also impose substantive regulations on risk”.  Though such regulations will “necessarily depend on the nature of the innovation…. one common principle should underlie substantive fintech restrictions: limiting contagion”.  For example, some robo-advisors already include “circuit-breaker” type features in their algorithms so as to reduce market volatility and prevent domino effects as parties rush to limit their losses. Such features could be made a requirement. Or, in the case of virtual currencies, regulations might focus on ensuring the trustworthiness of settlement mechanisms and the accuracy of distributed ledgers, in order to prevent breakdowns in the system and curtail herd behavior by consumers”.  In addition, there is the challenge of what could be done once a stampede has started.  Magnuson doesn’t think that struggling fintech companies should be provided liquidity by a Central Bank.  Rather, the “willingness to allow any particular fintech firm to fail should reduce the moral hazard problems in the (financial services) industry”.  He suggests that insuring consumers from losses would be a cost-effective way of restricting the pathways by which contagion is spread. After all, if bank depositors are insured from a certain minimum level of losses, why not consumers in fintech?  It is a tempting thought, but of course it assumes that all fintech firms are regulated, just as banks are, to keep an eye on their risk-management policies, procedures and outcomes.

That brings us to Magnuson’s third prescription, which relates to the difficulty of even identifying, let alone monitoring, the relevant actors.  Magnuson’s solution is to encourage self-policing – not just voluntary self-monitoring (including reporting one’s own compliance with regulatory obligations) but also the encouragement of all firms to monitor each other.  His argument is that “Fintech firms are in possession of idiosyncratic information that is poorly understood by outsiders.  Robo-advisors know their businesses and investment algorithms better than anyone else.  Crowdfunding sites understand their models and related vulnerabilities better than anyone else.  Virtual currency platforms understand the way that their currencies work better than anyone else.  All of these actors are better placed than regulators to identify material risks in their industries, such as the introduction of new players or the discovery of unexpected features.  Thus, they have the ability to identify relevant players and monitor their behavior much more effectively than outside regulators.  Fintech firms are also closely attuned to the activities of their competitors.  Fintech firms are constantly reviewing the competitive landscape to identify ways to improve their business, and, at least in virtual currency, much of the technology is “open source,” allowing fintech firms greater visibility into the functioning of alternative firms.  Thus, self-policing is likely to be particularly effective in the fintech sector”. 

Hmm, there are several issues here. 

First, if I am aware of the existence of fintech company AAA, how do I know whether or not the regulatory authority has AAA on its radar, unless all Fintech companies are required to be regulated, and to display their Regulatory Registration Number on their site? 

Second, does “open source” mean “open access to everything in the business”?  Doubtful.  Magnuson evades that issue by using the weasel wording of “greater visibility”.  He doesn’t discuss the distinction between “greater visibility” and “visibility sufficient to be able to monitor what’s really going on”. 

Further, will fintech firms be at all interested in monitor ingtheir competitors, suppliers and “co-opetitors”?  This is a problem that Magnuson acknowledges: “Monitoring is costly, and thus companies may not be willing to expend the resources necessary to do it, or they may not monitor at the optimal level.  Even if they do discover risks in their industry that could potentially create negative externalities for third parties, they may have incentives to refrain from changing their behaviors to curtail these risks if the suspect behaviors are profitable.  Thus, regulators will need to find ways to incentivize fintech to engage in an efficient level of self-policing. One particularly powerful way to do this is to leverage collective sanctions, imposing costs on the group when an actor misbehaves.  Collective sanctions are an effective way to utilize the superior information held by individual actors in a group and motivate them to use that information advantage to advance regulatory interests. By allowing regulators to impose costs on an industry as a whole, rather than requiring them to identify individual bad actors, collective sanctions can incentivize individual companies to monitor the potentially risky behaviors of other members of their group.”  Naturally, this begs the question of how “their group” is to be defined and by whom.  Magnuson thinks that, for example, debt crowdfunding platforms might be under the regulation that if a high number of loans in the industry default, the regulators will ratchet up the regulatory burdens on the industry as a whole.  Apart from “shutting the door after the horse has bolted”, this begs the question of how any such regulation coheres with Magnuson’s previous concern to avoid contagion in any situation where the public is already jittery because of the vulnerability or collapse of one player.  Possibly for this reason (though he doesn’t say so), Magnuson goes on to a possibility that has already been touted in banking as a whole: all relevant companies could be required to contribute to an insurance fund to pay for bad debts in the event of systemic shock. Such suggestions are good but inadequate in view of dangers with which we are familiar as a result of recent experience: regulatory capture, and commercial collusion, as well as whether insurance payments will be high enough to be sufficient given that there is no financial history for actuaries to utilise. So I’m afraid Magnuson doesn’t take us very far in relation to his third point.

His fourth point is the self-evident one that the fintech industry needs “a more internationally-minded regulatory regime (that) would take into account three fundamental principles:  first, fintech activity is not solely domestic, but rather crosses national borders and often raises complex jurisdictional issues; second, regulatory actions in one country will have effects on other countries; and third, regulators in other countries will have useful information about the effects of particular types of fintech regulation”.  These three considerations of course apply not just to fintech but to financial services as a whole – though that hasn’t allowed sufficiently sensible financial services regulation to emerge, for example to prevent booms and busts on a global scale.  So I’m afraid that, on this matter, Magnuson doesn’t take us much past homilies: “Governments … have an interest in cooperating to prevent systemic risk from materializing in the fintech sector.  They also have a broader interest in ensuring that fintech is not used to evade national regulations.  These important governmental interests provide an opportunity for regulators to cooperate to create responsible and appropriate measures to respond to and limit systemic risk factors in the fintech sector. This does not mean that fintech regulation must be uniform.  In fact, uniformity is both unlikely and undesirable at this stage of fintech’s development…. The aim is not so much to impose a single regulatory framework on all jurisdictions, but rather to ensure that regulatory competition and experimentation occurs in a way that produces useful and usable information for governments.”  In other words, let’s do here for fintechs what we already do for financial services as a whole – even when doing so would have results that are not only predictable but have already been experienced.  My view here too is, I hope, clear: a single regulatory framework for fintechs across the globe is not only desirable, it can also encourage experimentation and competition.

Let me close by thanking Magnuson for his paper.  It is good to have his wide-ranging contribution to a key matter on which there hasn’t been much discussion so far.


The conference, running yesterday and today, is organised jointly by the Federal Reserve Bank of Philadelphia and by the Journal of Business & Economics.

It features papers on:

·   Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information    

·   Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks

·    “The Law of One Bitcoin Price?

·   Blockchain Disruption and Smart Contracts

·   The Price of a Digital Currency

·   The Economics of Distributed Ledger Technology for Securities Settlement” 

·   Competition in the Financial Advisory Market: Robo versus Traditional Advisors

·   Does FinTech Affect Household Saving Behavior?

·   Integrating the Troublemakers: A Taxonomy for Cooperation between Banks and Fintechs

·    “Financial Regulatory Implications of Artificial Intelligence

·   Market Design with Blockchain Technology

·   Between the Lines: Decipher the Firms’ Fundamentals with Artificial Intelligence

   “Law, Trust, and the Development of Crowdfunding

·   Profit Sharing: A Contracting Solution to Harness the Wisdom of the Crowd

·   Financing Efficiency of Securities-Based Crowdfunding

The speakers are from universities, companies and other institutions from (in no particular order) the US, Canada, the UK, France, Germany, Australia, China and India – and perhaps other countries.


An analysis of data regarding investors’ internet usage suggests that machine analysts and human analysts are competitors.

Also that human analysts’ are losing.

That raises the question of whether it is in response to this development that human analysts are producing more optimistic, less accurate analysis of FinTechs and associated matters.

“The change in reporting quality is greatest for stocks where analysts’ conflicts of interest are strongest”.

All that is to be found in a paper presented to a conference, running yesterday and today, organised jointly by the Federal Reserve Bank of Philadelphia and by the Journal of Business & Economics.

The authors are Jillian P. Grennan and Roni Michaely, respectively of Duke University, and of Cornell University.




Australia, Canada and the EU seem to want to toughen rules.

Japan’s FSA is to start systematic monitoring of crypto-exchanges from next week.

America’s SEC is creating a cyber unit to tackle apparently wide misconduct in digital currencies.

China is not yet strangling crypto-mining but has been killing off cryptocurrencies for some weeks now.

So: what future for Bitcoin and other cryptocurrencies?

Frankly, I don’t know.  Clearly, this is not the time to start investing in them – and, if you are already invested, you need to review your portfolio pretty frequently.

However, I am confident of the future of blockchain-platforms for the present.  Though I fear they will also come under scrutiny and eventually be regulated, they serve a different and rather more useful function.

Many companies have been started with the objective of creating a single secure “verified digital identity” which could have multiple applicability.

Indeed, some claim to have such a technology already.

But it may be sobering to consider the largest such effort in the world: India’s programme (“Aadhar”) to provide all its 1.2 billion citizens with verified digital identities.

That programme has been a disaster – though not only for technical reasons.

Further, it may be instructive to consider the following:

I don’t know if you have the problem of a burgeoning, if not bursting, pocket because of the number of cards for banking and other business purposes that have to be carried nowadays.

I certainly have that problem.

In addition to the several “verified digital identities” that I carry most days, I have to carry, every time I travel internationally, the “most verified” of these (my Passport).

So the problem is merely that my many verified digital identities don’t talk to each other.

Could someone please start working on that?

Perhaps someone is working on that already?

Perhaps even on the possibility of using my “most verified digital identity” (my Passport) for all banking and other business purposes?

But halt a moment!

In such an ideal world, what if my “most verified digital identity” was lost or stolen?

Would I then have, in addition to the headache of getting a new Passport in order to be able to return home or travel out, also the problem of obtaining a new identity for all banking and business purposes (or getting my new identity/ Passport accepted for each of these )?!

In that case, might it be better, after all, to continue to have multiple verified digital identities, however inconvenient that is?

If one of my digital identities is lost or stolen, I can, in the immediate aftermath, still continue to function, to a greater or lesser extent, on the basis of the other (unrelated) identities that still remain with me..

Perhaps there is something to be said for a small amount of bother and inefficiency every day, in order to prevent a huge bother and complete paralysis at any unexpected point.

It used to be called, in technical circles, “redundancy”.

Non-geeks used to call it “insurance”.

The words, and the legalities (indeed, the underlying concepts) are different.

The attitude is the same: there is such a thing as too much short-term efficiency, too much leanness.

That also has a name.

In medical science, it is called anorexia.

So how much redundancy should one have?

The rule of thumb used to be: as much as might be necessary to overcome the worst disaster that you can foresee.

And a little extra, in order to cover even worse disasters that one can’t foresee at present.


How could it possibly be that some thought processes from pre-digital ages might have some validity in our VUCA world?!