Could Fintech Crash the Economy?

• Author: McKinley, Vern

Driverless Finance: Fintech's Impact on Financial Stability

By Hilary J. Allen

296 pp.; Oxford

University Press, 2022

So far in his presidency, Joe Biden has struggled to fill several leadership positions at the major banking authorities. The two most high-profile examples of this are the withdrawn nominations of Cornell law professor Saule Omarova for comptroller of the currency and attorney Sarah Bloom Raskin for vice chair for supervision on the Federal Reserve's Board of Governors. With a few glaring exceptions, these nomination battles were fought over the direction of banking policy that the two legal scholars would have pursued and what role the government should play on a host of emerging topics.

In Driverless Finance, American University law professor Hilary Allen weighs in regarding one of the major issues of disagreement: the use of technology to augment or replace traditional financial services. Allen has worked for several prominent law firms and also spent time on the staff of the Financial Crisis Inquiry Commission (FCIC), a body responsible for investigating the causes of the 2007-2009 financial crisis. This is her first book, and in it she tells the brief history of the rapid expansion of fintech and conveys her concerns about where its uncontrolled growth might lead.

The book's title gives readers the vision of fintech as a driverless car careening down the road, wiping out innocent financial bystanders who happen to cross its path. Although the fintech world is mostly focused on the micro level and financial innovation for individual consumers, Allen's argument is that we must be wary of fintech from a broader financial stability vantage point.

An ugly future? / Driverless Finance starts with a segment lifted from an imagined FCIC-style report produced in the year 2031. Allen imagines a financial crisis sparked by the fictional HAL Bank, a name inspired by the scary algorithmic-driven computer in 2001: A Space Odyssey. In Allen's version, HAL is a too-big-to-fail bank that owns a subsidiary, BotWay, that develops an algorithm that assimilates data from the cryptoasset markets into a trading program. The scheme goes awry, leading to instability and a bailout for HAL Bank. The cause of the crisis according to Allen's imagined report:

We conclude that the growth of the cryptoasset market was a key cause of the crisis.... We conclude that the government and the Federal Reserve were ill-prepared for the crisis and therefore...